E00973
EXCISE DUTY HYDROCARBON OIL  — assessment  —  HODA 1979 ss 12(2), 13(1A)  —  scope of s 13(1A)  —  whether encompassing assessment of excise duty other than in relation to contraventions under s 12(2)  —  no  —  FA 1994 s 12A  —  whether assessment under appeal valid under s 12A(2) although invalid under HODA s 13(1A)  —  yes

EXCISE DUTY RED DIESEL  —  no direct evidence that red diesel used in road vehicles  —  indirect evidence of acquisition of fuel from illegitimate sources  —  officer correct to assess on basis that all purchases of fuel not vouched as legitimate were of red diesel  —  assessment and review upheld  —  appeal dismissed     

MANCHESTER TRIBUNAL CENTRE

 

THOMAS CORNEILL & CO LTD trading as SPH GROUP	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Michael Johnson (Chairman)
JT Brian Strangward
Susan Stott FCA CTA

Sitting in public in Manchester on 27 October 2005 and 1 March and 4 July 2006

Jeremy Wellens, of VAT Solutions (UK) Ltd, Chartered Tax Advisers for the Appellant

Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

Nature of the appeal

1.	The Appellant is in business as a plant and haulage contractor.  

2.	On 1 July 2004, H M Customs and Excise (“Customs”) issued a notice of assessment (“the assessment”) to the Appellant for unpaid excise duty totalling £67,479.85.  

3.	The assessment is said to represent the amount of rebated duty due in respect of fuel used in the Appellant’s road vehicles contrary to the Hydrocarbon Oil Duties Act 1979 (“the 1979 Act”).  The Appellant has appealed against the assessment on the ground that the duty is not due.

Background to the assessment under appeal 

4.	The assessment arose in the following circumstances.  The contents of this section of our decision are not in dispute.

5.	On 27 November 2003, officers of Customs tested the contents of the fuel tank of one of the Appellant’s vehicles on the public highway and found traces of rebated gas oil (“red diesel”) in the tank.   The level of contamination with red diesel was 6 per cent. 

6.	That same day, officers of Customs presented themselves at the Appellant’s premises in Failsworth, near Oldham, and at the farm in Warburton which is the home of Mr Thomas Corneill, the managing director of the Appellant.  The officers tested the tanks of the Appellant’s other road vehicles that they found there, and the contents of the storage tank from which those vehicles were fuelled.  All those tests were negative: no traces of red diesel were found.

7.	The positive test of the vehicle examined on the highway is not in dispute.  The vehicle tested was seized by Customs, on the basis that it had been unlawfully used on the highway with red diesel as fuel.  The vehicle has since been restored on payment by the Appellant to Customs of £1,040 for civil penalties and removal and storage charges relating to that vehicle.  

8.	The tribunal is not concerned with the seizure of that vehicle or the sums paid to secure its restoration.  The tribunal’s sole concern is with the assessment.  The assessment relates to the period 1 January 2002 to 27 November 2003.  The assessment has been constructed on the basis that, in respect of the total mileage covered by all the Appellant’s road vehicles during that period, the lion’s share was incurred using red diesel.

9.	Customs uplifted from the Appellant its records of fuel purchases.  Some of those records showed purchases of fuel from a legitimate supplier.  As to those supplies, there could be no suspicion of acquisition of red diesel to power the Appellant’s vehicles.  The bona fides of other purchases was unclear.  The Appellant did not hold documentation on the basis of which Customs were satisfied that those purchases were not of red diesel.    

10.	The Appellant did not offer to Customs what Customs considered to be satisfactory explanations of its fuel purchases.  That state of affairs led to the assessment.

Methodology of the assessment

11.	The assessment was issued by Mr Michael Gilmore, an officer of Customs.  It was backed by an audit of the Appellant’s records done by Mr Gilmore, showing a total of 169,071.71 litres used during the period of the assessment, of which 29,781.12 were vouched as “legitimate”, leaving a difference of 139,290.59 litres.  

12.	Three rates of heavy oil (“DERV”) rebate were in force during the period of the assessment, so Mr Gilmore subdivided the difference into 92,860.32 litres to which the first rate of rebate was notionally applicable, and 35,022.75 and 11,407.41 litres respectively to which the second and third rates of rebate were said to apply.  The total amount of “illegitimate” rebate said to have been obtained by operating the Appellant’s vehicles came to the assessed amount of £67,479.85.

The issues for decision

13.	The two issues before the tribunal are agreed to be these:

1)	Were Customs entitled to assess the Appellant in respect of all its road vehicle usage, although only one vehicle tested positive, and no other direct evidence existed of the operation of the Appellant’s vehicles using red diesel?  This issue has to do with the statutory construction of the assessing provisions.

2)	Were Customs entitled to assess the Appellant on the basis that all its purchases of fuel, apart from the 29,781.12 litres vouched as “legitimate”, were of red diesel?  This issue has to do with the evidence available to Customs and the view taken by the tribunal of the facts.

14.	There is no issue as to the amount of the assessment, should the tribunal hold that Customs were entitled to assess in the way they did.  In particular, it is not contended that the mileage adopted by Mr Gilmore in his audit, the resultant quantities of fuel consumed, or the calculation on the basis of that consumption, are in error.  It is the underlying principles of the assessment that are in dispute.

Jurisdiction and powers of the tribunal

15.	This appeal comes before the tribunal pursuant to section 16 of the Finance Act 1994 (“the 1994 Act”).  Following the assessment, the Appellant consulted VAT Solutions (UK) Ltd, Chartered Tax Advisers.  On 2 August 2004 Mr Wellens of that company, who represented the Appellant before this tribunal, requested Customs to review the assessment pursuant to section 14(2) of the 1994 Act.  

16.	Further to that letter, Mr Wellens set out the Appellant’s position in a letter dated 23 August 2004.  That letter is commendable for having set out in a succinct yet comprehensive manner the basis of the Appellant’s appeal.     

17.	The review of the assessment was conducted by Mr David Harris, an officer of Customs.  The result of the review was contained in a letter dated 23 September 2004.  That letter too is succinct, but it is fair to say that, although express reference is made to Mr Wellens’ letter of 23 August 2004, the review does not do justice to its contents.  

18.	The review simply rejects the reasoning of the letter, concluding that “the Commissioners [of Customs and Excise] consider that the method they have used in arriving at the assessment … provides an entirely reasonable basis for notifying the assessment in accordance with [section 13(1A) of the 1979 Act].”  The review letter did not elaborate upon this conclusion.

19.	On 19 October 2004 Mr Wellens issued the appeal on behalf of his client against the result of the review, on the ground that inadequate account was taken of and insufficient weight given to the circumstance that, when tested, the Appellant’s fuel tanks and road vehicles, with the exception of the single vehicle seized, were untainted by rebated fuel.  

20.	In the notice of appeal, Mr Wellens stated, inter alia:

“We have been informed by the reviewing officer that, because the appeal involves an assessment to reclaim a rebate, then this sum falls outside the terms of [section 16(3) of the 1994 Act] and thus the sum need not be paid before the tribunal can hear the case.”        

21.	However the assessment is on its face for amounts of excise duty, and it is of such kind as is mentioned in section 14(1)(ba) of the 1994 Act.  Having regard to section 16(3) of the 1994 Act, we think that the appeal is not, therefore, such as can normally be entertained without prior payment of the amount of the assessment.  The amount of the assessment has not been paid.  No such certificate as is referred to in section 16(3)(a) has to our knowledge been issued, nor has it been required.  

22.	Nevertheless we decide that the appeal should be entertained by us, pursuant to section 16(3)(b), on the basis that the Appellant would have pressed for the grant of a certificate under section 16(3)(a) if Customs had insisted upon such a certificate as a condition of the appeal, in which case it would not, in our view, have been reasonable for such certificate to have been refused.  We say this having regard to the size of the assessment in relation to the business of the Appellant.  

23.	In the premises the appeal is validly constituted.  That being so, the tribunal has available to it a range of powers under section 16(4), (5) and (8) of the 1994 Act, the most important of which are the power to quash the decision to assess the Appellant and to substitute the tribunal’s own decision, and the power to vary the assessment.

First issue – statutory basis of the assessment

24.	At the hearing of the appeal, H M Revenue and Customs (“HMRC”) were represented by Nigel Poole of counsel.  

25.	Mr Poole submitted that the assessment ought to be treated as validly made under two distinct assessing provisions, namely section 13(1A) of the 1979 Act and section 12A(2) of the 1994 Act.

26.	Section 13(1A) states:

“Where oil is used, or is taken into a road vehicle, in contravention of section 12(2) above, the Commissioners may –

(a)  assess an amount equal to the rebate on like oil at the rate in force at the time of the contravention as being excise duty due from any person who used the oil or was liable for the oil being taken into the road vehicle; and

(b)  notify him or his representative accordingly.”

27.	Thus it is a condition precedent to making the assessment that rebated oil should have been used as fuel for a road vehicle by the person assessed, or that he is liable for taking the oil into that vehicle as fuel, as section 12(2) mentions.  However, is the scope of section 13(1A) confined to assessments in respect of rebated fuel used for, or taken into, that particular vehicle?

First issue – submissions for HMRC 

28.	Mr Poole argued that it would be nonsensical if the section were so confined.   There must be many situations, he submitted, where it is obvious that rebated fuel has been used for powering vehicles other than the vehicles that have tested positive, so that a more extensive assessment is justified than one purely in relation to the manifestly offending vehicles.  It would, he submitted, be a question of evidence in each case whether a more extensive assessment could be supported.  If, however, he was wrong as to the construction of section 13(1A), then he relied upon section 12A(2) of the 1994 Act as validating the assessment.

First issue – submissions for the Appellant   

29.	Mr Wellens, by contrast, submitted that the opening words of section 13(1A) have exclusively to do with the particular road vehicle, or vehicles, in relation to which there have been one or more proven contraventions of section 12(2).   Section 13, he submitted, is entirely dealing with the penalties and other consequences – some of them criminal – flowing from those contraventions.  So, he submitted, section 13(1A) is not a general assessing provision for excise duty due from a person; rather it relates to the duty due in respect of the oil used as fuel by, or taken into, the particular vehicle or vehicles to which section 12(2) refers.  That, he submitted, invalidated the assessment, as it was a global assessment as to all the Appellant’s vehicles made pursuant to section 13(1A), but was not limited to the contraventions already demonstrated pursuant to section 12(2), as to which only one vehicle was affected.

First issue – decision of the tribunal

30.	We can see the logic of Mr Poole’s argument on the construction of section 13(1A).  However we do not see the purpose of the opening words to section 13(1A), ie “Where oil is used, or is taken into a road vehicle, in contravention of section 12(2) above”, unless section 13(1A) is specifically directed to assessing in relation to that vehicle, or those vehicles, as to which a contravention has been shown.  The operative words in section 13(1A)(a) authorise the assessment of the person who used the oil or was liable for the oil being taken into “the” road vehicle (not “a” road vehicle).  The reference to “the” road vehicle can only relate back to the opening words of section 13(1A).  There are, moreover, two references to “the” oil, which again hark back to the particular contravention or contraventions in section 12(2). 

31.	We also note that the computation of the assessment is to be by reference to the rebate at the rate in force “ … at the time of the contravention”.  If the construction urged by Mr Poole is correct, it is hard to see the sense in constructing a general assessment slavishly by reference to that rate.  Indeed, that is not what Mr Gilmore did in this instance: he used three different rates of rebate in his calculation, being those applicable during the periods in which, as he found, the Appellant’s vehicles had been operated. 

32.	Section 13(1A) may be capable of being construed as submitted by Mr Poole.  However, it would be surprising if Parliament, having used a form of words apparently directed to contraventions in respect of a particular vehicle or vehicles as described, intended a broader assessing power to arise, without making that clear.  Of the two possible constructions, the specific and the general, we decide that the specific construction is the correct one, as being the more obvious, the less sweeping, and the construction more favourable to the person potentially liable for the duty.

33.	Another matter influences us in so deciding.  It is that Parliament has separately provided for the more general power of assessment contained in section 12A of the 1994 Act.  That section was inserted into the 1994 Act by the Finance Act 1997, ie before the enactment of section 13(1A) of the 1979 Act, which was inserted into the 1979 Act by the Finance Act 2000.

34.	Section 12A(2) authorises an assessment for excise duty where section 12A(1) applies, that is to say where excise duty relief has been given which ought not to have been given, or would not have been given had the facts been known or been as they later turn out to be.

35.	Section 12A(3), which deals with the matter of liability to such an assessment, makes it clear that the assessing power contained in section 12A(2) is independent of section 13 of the 1979 Act.  The section 13 power is referred to in section 12A(3)(c), whereas the power given by section 12A(2) is separately referred to in section 12A(3)(a).

36.	Mr Wellens does not dispute that excise duty in respect of the use of rebated fuel in road vehicles, where there should have been no relief from duty, is assessable pursuant to section 12A(1) and (2), so long as the evidence bears this out.  

37.	It is a feature of the present appeal that whilst both Mr Gilmore, the assessing officer, and Mr Harris, the reviewing officer, treated the assessment as having been made under section 13(1A) of the 1979 Act, the assessment itself does not state that it has been made under that section. 

38.	We decide that power to make the assessment existed under section 12A of the 1994 Act.  Accordingly, subject to the Appellant’s rights of appeal under section 16 of the 1994 Act, which the Appellant is now exercising, notification of the assessment to the Appellant under section 12A(3) had the effect of making the Appellant liable for the amount of the rebate as excise duty.

39.	The upshot is therefore that the Appellant has succeeded in demonstrating that the assessment was not properly made under section 13(1A) of the 1979 Act, but we accept the submission of HMRC that the assessment properly stands as made under section 12A(2) of the 1994 Act.   

Second issue – facts found by the tribunal

40.	We heard oral evidence from each of Mr Corneill, Mr Gilmore and Mr Harris.  

41.	We also had the benefit of considering the contents of bundles of copy documents handed in by Mr Wellens and Mr Poole respectively for the first day of the hearing (27 October 2005), and of a further bundle of documents produced by the Appellant for the purposes of the final day of the hearing (4 July 2006).  The hearing was adjourned on the second day of the hearing (1 March 2006) to enable the production of those documents and their discussion between the parties.

42.	We find the following facts.

43.	The documents produced attribute five sources to the fuel purchases that were treated by Mr Gilmore as illegitimate in his audit underlying the assessment.  These are GSG, M Healey Services, Star Fuel, Geo Broughton and CPL Petroleum respectively.  

44.	HMRC say, and we accept, that invoices held by the Appellant from GSG show the VAT registration number of a clothing store in London, namely Cromwell’s Madhouse.  Similarly, invoices ostensibly from M Healey Services have the VAT registration number of a company in Hull dealing in rubber, namely Arco Limited.  Neither concern is in the business of supplying fuel. 

45.	The Star Fuel invoices held by the Appellant gave the VAT registration number of Star Tractor and Motor Oil Company Limited.  We were informed by Mr Gilmore, and Mr Wellens has not attempted to dispute, that that company has stated that it did not issue the invoices held by the Appellant and that it has never supplied the Appellant with fuel.

46.	The Geo Broughton invoices held by the Appellant bear the VAT registration number of a fuel supplier of that name.  That concern has denied that it issued the invoices, and has stated that it did not make supplies to the Appellant.  Similarly, Mr Wellens has not sought to challenge this denial.

47.	Mr Gilmore told the tribunal that CPL Petroleum was a known supplier of red diesel.  Again, Mr Wellens has not sought to dispute this. 

48.	On the strength of the foregoing, we find on the balance of probabilities that the invoices mentioned are false, insofar as they purport to evidence legitimate supplies.  As we see it, it is probable that the supplies of fuel to which they purport to relate were illegitimate.

49.	However, the nature of the Appellant’s case is that it acted in complete good faith in dealing with individuals who held themselves out as suppliers of fuel invoiced in the manner described.  If the suppliers were not genuine, then, it is said, that was not known to the Appellant.  Moreover it is pure speculation, the Appellant says, that red diesel was sold to the Appellant by those suppliers.  There is no direct evidence of that.

50.	Mr Corneill described the nature of the Appellant’s business to the tribunal.  We make the following findings.

51.	The business uses both rebated gas oil for its plant machinery and white (ie unrebated) diesel in its road haulage activities.  The business has a high turnover of road vehicles, which it buys and sells on, either as brand new or having operated the vehicles for three or four months.  By agreeing to buy several dozen new vehicles at a time directly from the manufacturer, for supply and onwards disposal over a period, and by only operating some 6 to 10 of the vehicles itself at any one time, the Appellant achieves negligible levels of depreciation.

52.	Just as the Appellant negotiates good deals in respect of its vehicles, so it “rings round” to obtain fuel at the best price, playing off one supplier against another.  The Appellant is happy to give an unfamiliar supplier the opportunity to sell it fuel, if the price is right.  Fuel is delivered at the Appellant’s premises and its employees will supervise the quantity received.  

53.	Mr Corneill could not explain why one of the Appellant’s vehicles had tested positive.  He speculated that the pump used for the fuel taken on by that vehicle at the Appellant’s premises, from the white diesel tank, had been primed and contaminated by prior use with rebated fuel from the Appellant’s other tank.  There was also the possibility that one of the Appellant’s drivers might have used the vehicle tank to hold red diesel subsequently siphoned off for illegal resale for use in diesel-powered motor cars.  

54.	Whilst these are possible explanations of what might conceivably have happened, Mr Corneill agreed in cross-examination that the pump-priming explanation could not account for the level of 6 per cent contamination detected in the case of the vehicle that tested positive.  There is no evidence before us that drivers were or even might be stealing fuel as suggested.

55.	Accordingly we do not find there to be substance in these explanations.

56.	We find that the Appellant had an employee, Carly Bonnell (“Carly”).  Carly was expected and instructed by Mr Corneill to provide Customs with the information they required, in order fully to understand the Appellant’s purchases of fuel.  We find that although Mr Corneill left this matter to Carly to attend to, she did not provide Customs with the information they sought.  Mr Gilmore spoke to her over the telephone, and he wrote to her two letters, dated 6 January and 20 May 2004, detailing the documentation that he required to see.  That documentation was not provided.

57.	Mr Corneill told us, and we accept, that Carly was at the time (2004) having personal problems.  He told us that she had become “swamped” with work, and had not been opening and dealing with certain items of mail.  A lot of things had been left undone by her.

58.	We record that the hearing of the appeal was adjourned on 27 October 2005 because it was felt that, if Mr Corneill had the opportunity to assemble and present to HMRC information that Carly might have provided had she been on top of matters, this would justify the Appellant’s position as to fuel purchases.  Our direction of that date specified the information that, by agreement between the parties, the Appellant would provide, by not later than 13 January 2006.  

59.	That information consisted of evidence of payment for the fuel supplies in dispute, including all the Appellant’s bank statements for the years 2002 and 2003; all relevant cheque stubs; photocopies of all relevant cheques; evidence of all relevant cash withdrawals; and the contact details of the suppliers.

60.	The resumed hearing of the appeal on 1 March 2006 was abortive because, as Mr Wellens explained in a written submission to the tribunal dated 31 January 2006, reaffirmed orally before us on 1 March, many of the required documents had been misplaced.  They came to light, very late in the day, as being in the possession of the Appellant’s accountants, who are Hanley & Co, Chartered Accountants of Hale Cheshire, having been misfiled by that firm.  We have seen a letter dated 26 January 2006 from Mr Anthony Knowles, FCA of that firm, explaining the circumstances.   

61.	We accept the contents of that letter at face value.  We do not hold it against the Appellant that it was necessary to adjourn the hearing of the appeal a second time, and indeed, having learned the background to the late availability of the documentation, we made a direction on 1 March 2006 that HMRC should pay the Appellant’s costs of and concerning the hearing on 1 March 2006 in any event.

62.	However the adjournment for the purpose of producing the agreed information has regrettably raised more questions than it has answered.

63.	In the first place, no contact details for suppliers have been forthcoming.  At the hearing on 27 October 2005, Mr Corneill handed the tribunal a business card for Star Fuel.  We were left with the impression that, following the adjournment, we might learn further details of suppliers to the Appellant.  Mr Corneill’s answer to the non-existence of suppliers’ details was that the Appellant had moved office, and that old diaries containing the details had been disposed of.  

64.	Secondly, there remains no evidence of a payment for fuel to Star Fuel dated 5 June 2002.  Mr Corneill stated that the fuel will have been paid for, and he suggested that the bill might have been settled by a different company.  Although there is some suggestion that Mr Corneill may have been involved with other companies in the past, we do not see how this can be a valid explanation, and we reject it.

65.	Thirdly, in respect of a purchase of fuel from Star Fuel dated 10 April 2002, payment for this is said to be represented in part by a cheque for £7,000 made out by Mr Corneill to cash, and a second cheque, made out by Mr Corneill in blank, for £4,000.  The two cheques are in sequence and are both dated 11 April 2002; however the amounts of the cheques were collected from the Appellant’s bank account on different days.

66.	Mr Corneill’s evidence was that that method of payment was required by the individuals with whom he dealt at the time.  He pointed out that the second of the two cheques, the one made out in blank, had been completed, in the handwriting of someone else, with the name of FitzOil Ltd as payee.  He claimed to know nothing about that company.  

67.	Mr Gilmore told us, and we accept, that FitzOil Ltd was a distributor of mainly red diesel up until 2002, when it ceased trading.

68.	The bill for the supply on 10 April 2002 was invoiced at £18,500.  Mr Corneill’s evidence was that he paid the difference between the amount of the two cheques for £7,000 and £4,000 respectively and the invoiced price of £18,500 using cash that he had to hand.  Yet it is clear from the Appellant’s relevant bank statements, copies of which have been produced, that the Appellant was comfortably in credit and that movements on its bank account made it unnecessary to make payment in cash.

69.	We are left unable to understand why payment for the supply on 10 April 2002 should have been partly by one cheque, made out to cash, partly by another, made out in blank, and as to the balance (£7,500) in cash.  The only explanation offered by Mr Corneill was that that was how those with whom he dealt required settlement.

70.	Fourthly, Mr Corneill was asked about the fuel purchase from Star Fuel dated 23 May 2002.  That purchase was also paid for by two cheques, again with a balance settled in cash.  The two cheques, both dated 24 May 2002, are in sequence; however the amounts of the cheques were again collected from the Appellant’s bank account on different days.
71.	One cheque, for £4,871, was made out to cash.  The other, for £4,000, was made out in blank.  The name of the payee has been filled in, in another hand, as T Splitt Ltd.    

72.	Mr Gilmore told us, and we accept, that T Splitt Ltd was a supplier of mainly red diesel up until 2002, when it went into liquidation, at which time the name of the company was purchased by another distributor.

73.	Again, the bill for fuel on 23 May 2002 was for more than the total of the two cheques.  It was invoiced at £12,500.  The difference between £8,871 and that amount is unaccounted for.

74.	Mr Corneill was also asked about the cheque stub for the cheque for £7,000 used in part settlement for the purchase dated 10 April 2002.  He accepted that the stub was in his handwriting.  The stub refers to “Star Fuel Distribution”.  Mr Corneill told the tribunal that it was that entity that he believed that he was purchasing from.  However the cheque itself was, as mentioned above, made out to cash.

75.	Similarly, Mr Corneill accepted that the cheque stub for the cheque for £4,000 used in part settlement for that purchase was in his handwriting.  The stub also refers to “Star Fuel Distribution”.  Mr Corneill told us that that was the entity that he believed would be cashing the cheque.  However the cheque itself was, as mentioned above, left blank.

76.	Mr Corneill told the tribunal that he did not know that any supplies were of illegitimate red diesel.  He had simply paid his suppliers as they had requested to be paid.  Mr Corneill said that it would make no sense for the Appellant to run the risk of contaminating the fuel tanks of any of its road vehicles with red diesel, since they were all to be sold on in early course.    

77.	Mr Gilmore told the tribunal that, in performing his audit and constructing the assessment to include as illegitimate all purchases which had not been demonstrated to Customs’ satisfaction to be legitimate, he had done no more than follow the standard guidance issued to Customs officers at the time.  A positive test of one vehicle was enough to “trigger” that approach.   

78.	He had taken an initial view that the invoices from the suppliers mentioned above were false, and that the supplies were not legitimate.  That was why contact details had been required from the Appellant, so that these suppliers could be followed up.  Those details had not been provided prior to or at the time of the assessment.

79.	In cross-examination, Mr Gilmore accepted that the amounts of fuel shown by the invoices to have been purchased were consistent with the mileage covered by the Appellant’s vehicles according to their tachographs and other documentation.  Mr Gilmore said that the lack of positive tests for red diesel, save in respect of the single vehicle seized, was explicable by the Appellant’s last two purchases of fuel, between 10 April 2003 and 27 November 2003, having been legitimate ones, as was not disputed by HMRC.        

80.	Mr Gilmore accepted that there was no direct evidence of red diesel having been used in the Appellant’s road vehicles, with the exception of the one vehicle that had tested positive.  However he maintained that there was ample indirect evidence justifying the assessment.

81.	Mr Gilmore drew the attention of the tribunal to the fact that CPL Petroleum and another entity called Carlton were recorded as suppliers of gas oil to the Appellant.  Mr Gilmore said that Carlton was also a known supplier of red diesel.

82.	Mr Harris in giving evidence told the tribunal that, in conducting his review, he too proceeded in accordance with the guidance he had from Customs.  He said that he thought that the situation he was considering was a “finely balanced” one that was “not clear-cut”.  Mr Harris was at pains to stress that the grounds of the appeal might not be totally without merit.  

83.	Mr Harris maintained that, whilst admittedly short, his review letter fulfilled the legal requirements.  He did not appear concerned that the review was unreasoned.

Second issue – submissions for HMRC

84.	For HMRC, Mr Poole accepted that there was no direct evidence of the use of red diesel by the Appellant, save in the case of the one vehicle seized, but he submitted that the explanation for this was that the two most recent purchases of fuel by the Appellant had been of legitimate fuel, which accounted for the negative tests conducted by Customs.

85.	He submitted, however, that the volume of indirect evidence of the purchase and use of red diesel was substantial.  One would have expected the Appellant to know with whom it was dealing and what it was purchasing.  Instead, everything indicated that the Appellant was unconcerned to verify the legitimacy of the purchases.  The methods used for purchasing the fuel greatly facilitated the acquisition of illegitimate fuel.  In particular, the way in which the fuel was paid for, exemplified by two of the alleged purchases from Star Fuel, each paid for by a cheque made out to cash, a blank cheque and the balance in cash, were colourable.

86.	He submitted that the Appellant was not in good faith.  He invited us to uphold the assessment.  

Second issue – submissions for the Appellant

87.	For the Appellant, Mr Wellens submitted that, in the absence of direct evidence of the use of red diesel, the assessment was “too large a leap”.  There was no suspicion of a deliberate hiding of evidence – the Appellant had willingly and openly provided all the information and documentation it had.  He invited the tribunal to hold that the indirect evidence of the purchase of allegedly illegitimate fuel was insufficient.  In effect, he submitted, the Appellant was suffering a further penalty for the single positive test on the vehicle that had been seized and restored.

88.	He submitted that the assessment went beyond what the law contemplated.  He invited the tribunal to accept Mr Corneill’s explanations of how traces of red diesel may have got into the single vehicle testing positive, and to reject the proposition that any of the Appellant’s vehicles were ever operated using rebated fuel.

89.	He submitted that Mr Corneill was not dishonest.   He invited us to reverse the decision contained in the review letter and to discharge the assessment. 

Second issue – decision of the tribunal

90.	For the assessment to be upheld, it is unnecessary for us to find proof that the Appellant knew at any stage that he was purchasing red diesel for road use.  It suffices to justify the assessment under section 12A(2) of the 1994 Act that the facts demonstrate that it was, on the balance of probabilities, red diesel that he was acquiring from the suppliers mentioned in paragraph 43 above.

91.	We consider that the facts do indeed demonstrate this.

92.	It is in our view significant that, in the case of two of the supplies ostensibly from Star Fuel, cheques used in part-payment for the supplies were made out to cash or in blank.  If the suppliers were reputable, payment would not have been sought in this manner.  Rather, an audit chain would have been created enabling the identification of the seller.  As it was, the identity of the seller would not be certain at the point of sale, even if contact details for the particular individuals with whom the Appellant dealt were available.

93.	Moreover, we have the evidence of Mr Gilmore that FitzOil Ltd and T Splitt Ltd respectively, in whose favour (as we find) the blank cheques were completed, were known to Customs as vendors mainly of red diesel.  We accept that evidence.  It is likely, therefore, that the fuel paid for by those cheques was red diesel, and that it was red diesel that was acquired by the Appellant, seeing that the Appellant drew the cheques.

94.	The manner in which the Appellant obtained its fuel allowed great scope for excise duty fraud.  If one is prepared to seek out fuel from the cheapest source, as was the practice of the Appellant, and not to ask too many questions, as was the approach of Mr Corneill, it is only to be expected that the fuel supplied would be red diesel.  

95.	Of the suppliers queried by Customs, one of them, CPL Petroleum, was a known supplier of red diesel.  Other suppliers, ostensibly GSG and M Healey Services, appear to have “covered their tracks” by specifying VAT registration numbers on their invoices relating to concerns not in the business of supplying fuel at all.  Star Fuel and Geo Broughton deny making supplies to the Appellant at all – and it is not suggested that they did.    These supplies must have been from some other source.

96.	There is no reason to think that any of these supplies were of fuel other than red diesel.  With regard to those supplies not evidenced by payment details, we would expect payment to have been made in a manner that did not facilitate tracing, just as in the case of those whose payment details we have seen.  

97.	We are unimpressed by Mr Corneill’s protestations that he would not wish to sully the tanks of his vehicles with red diesel, given that his company did not operate checks to ensure the legitimacy of the fuel acquired.  On the contrary, the Appellant facilitated any illegitimacy by its method of payment.  Particularly unimpressive was the way in which the totality of the payments in the two alleged Star Fuel purchases examined by us was arrived at.  We reject as bad business practice the method of part-payment by cheque and part-payment in cash – substantial sums of cash at that – whereby no record was left in the Appellant’s books for accounting purposes.

98.	Much of the Appellant’s documentation sought by HMRC in October 2005 was found to be with the Appellant’s accountants.  But the Appellant nevertheless remained unable to provide at the final hearing full purchase information with regard to many of the purchases queried by Mr Gilmore in 2004.  It appears to us that that lack of documentation is inadequately explained.  Carly may have been at fault in not responding to Customs’ requests in 2004, but she cannot have been responsible for the failure on the part of the Appellant to maintain and preserve records.  

99.	Particularly unsatisfactory, in our view, is the alleged disposal of diaries said to contain contact details for suppliers.  The interest of Customs in these supplies was apparent to the Appellant from late November 2003 onwards.  The Appellant’s 2003 diary should have been available.  We feel that it is inherently unlikely that the Appellant’s 2002 diary would already have been destroyed.  

100.	At the hearing in October 2005, Mr Corneill produced the Star Fuel business card mentioned above, and he appeared confident that further contact details for the Appellant’s suppliers could be provided by 13 January 2006.  Our direction dated 27 October 2005 took the form it did on the strength of that confidence.   It is therefore a matter for surprise that no further details have been forthcoming.

101.	We conclude that the likelihood is that, had contact details been provided, these would have gone to confirm our firm impression that all the supplies in issue were of red diesel. 

102.	Mr Wellens is correct that there is no direct evidence of the use of red diesel by the Appellant, save in the case of the one vehicle that was seized and afterwards restored.  But it seems to us that the absence of such evidence is adequately accounted for by the purchases of legitimate fuel that took place between 11 August and 27 November 2003.  Following those purchases, it would be surprising, we think, if sufficient traces of red diesel remained in the road fuel storage tank, or in the fuel tanks of the Appellant’s vehicles, for positive tests to be obtained.

103.	The Appellant has therefore been unlucky, as we see it, in suffering a positive test even in the case of one of its vehicles.  That has stirred up a hornet’s nest, as a result of which all the Appellant’s fuel purchases have been placed under scrutiny.  No satisfactory explanation has been offered for the red diesel detected in the tank of one vehicle.  

104.	However, as we say above, the tribunal is not concerned with the circumstances of that vehicle.  We do not find, and we do not need to find, that the Appellant was responsible for the presence of red diesel in the fuel tank of that vehicle.  We are concerned with the validity of the assessment.  

105.	In our opinion, the absence of direct evidence of use of red diesel by the Appellant is indecisive, having regard to the explanation put forward for the lack of positive tests.  Of decisive weight is the body of evidence, including circumstantial evidence, that the purchases made by the Appellant are likely to have been of red diesel.  In that regard, we see no reason to distinguish between any of the supplies regarded by Customs as illegitimate, all of which appear to us to be suspect.

106.	We therefore decide the second issue in favour of HMRC. 

Conclusion

107.	For the above reasons, the assessment appears to us to be well-founded, and we find that the assessment, and the outcome of the review upholding it, are fully justified.  This appeal is accordingly dismissed.

Costs

108.	At the conclusion of the hearing, Mr Poole indicated that HMRC would not be seeking costs, should they succeed.  That being so, it is unnecessary for us to consider the effect as to costs of the Appellant having been partially successful in respect of the first issue.  That success is, in our view, adequately reflected in there being no order as to the costs of the appeal as a whole.

109.	Our decision to make no order as to costs of the appeal as a whole does not, of course, affect the order contained in our direction made on 1 March 2006 that HMRC are to pay the Appellant’s costs of and concerning the hearing on 1 March 2006 in any event.  We grant liberty to apply in case of difficulty in quantifying those costs.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 27 July 2006
MAN/04/8108