England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
Mr Justice Birss and Judge Roger Berner
UT/2015/0135

		Royal Courts of Justice Strand, London, WC2A 2LL
		25 January 2018

Lord Justice David Richards :

1. This appeal raises one issue. Where a penalty is imposed on a person in possession of goods on which it is alleged that excise duty has not been paid, is the reverse burden of proof on whether duty has been paid incompatible with article 6(2) of the European Convention on Human Rights and Fundamental Freedoms (the Convention)? The Upper Tribunal held that it was compatible and Euro Wines (C&C) Limited (the appellant) appeals with leave granted by this court.
2. The penalty in this case was imposed under paragraph 4(1) of schedule 41 to the Finance Act 2008 which provides:

"A penalty is payable by a person (P) where –

(a) after the excise duty point for any goods which are chargeable with a duty of excise, P acquires possession of the goods or is concerned in carrying, removing, depositing, keeping or otherwise dealing with the goods, and

(b) at the time when P acquires possession of the goods or is so concerned, a payment of duty on the goods is outstanding and has not been deferred."

3. As is apparent from the terms of paragraph 4(1), a penalty may be imposed on any person irrespective of their own liability to pay the excise duty on the goods. It is enough that they have come into possession of the goods or been concerned in their carriage etc at a time when duty should have been, but has not been, paid. By virtue of paragraph 6, the amount of the penalty will be determined according to whether there has been a deliberate and concealed act or failure (100% of the potential lost revenue), a deliberate but not concealed act or failure (70%) or an act or failure that was neither deliberate nor concealed (30%), with power for HMRC to reduce the penalty. The penalty in the present case (£31,864.40), as reduced by HMRC, fell into the last of these categories.
4. On an appeal to the First-tier Tribunal against the imposition of a penalty under paragraph 4(1), the burden of proving that duty has been paid on the goods lies on the appellant. This arises under section 154(2) of the Customs and Excise Management Act 1979 which provides:

"Where in any proceedings relating to customs or excise any question arises as to the place from which any goods have been brought or as to whether or not—

(a) any duty has been paid or secured in respect of any goods; or

(b) any goods or other things whatsoever are of the description or nature alleged in the information, writ or other process; or

(c) any goods have been lawfully imported or lawfully unloaded from any ship or aircraft; or

(d) any goods have been lawfully loaded into any ship or aircraft or lawfully exported or were lawfully waterborne; or

(e) any goods were lawfully brought to any place for the purpose of being loaded into any ship or aircraft or exported; or

(f) any goods are or were subject to any prohibition of or restriction on their importation or exportation,

then, where those proceedings are brought by or against the Commissioners, a law officer of the Crown or an officer, or against any other person in respect of anything purporting to have been done in pursuance of any power or duty conferred or imposed on him by or under the customs and excise Acts, the burden of proof shall lie upon the other party to the proceedings"

5. Section 154(2) applies to all types of proceedings: civil proceedings, proceedings that are criminal under domestic law and proceedings that would otherwise be civil under domestic law but are criminal proceedings for the purposes of article 6 of the Convention.
6. The provisions of section 154(2) have for many years formed part of the legislation governing proceedings relating to customs or excise. Its immediate predecessor, section 290 of the Customs and Excise Act 1952, itself consolidated earlier provisions. They reflect the particular difficulties in collecting duty on moveable goods, as well as the importance of the collection of duty to the public finances.
7. The effect of section 154(2) on proceedings concerning a penalty under paragraph 4(1) is that burden of proof is in part reversed. The burden is on the Commissioners (HMRC) to establish that the person in question has acquired possession of goods or been concerned in their carriage etc, that the goods are chargeable with duty and that the excise duty point for the goods has passed. The burden is on the appellant to establish that the duty has in fact been paid.
8. The rigours of this regime are mitigated not only by the opportunity provided to the person concerned to establish that duty was paid on the goods but also by other provisions.
9. First, paragraph 14 of schedule 41 which provides for a reduction if there are special circumstances (which HMRC's Compliance Handbook defines as "uncommon or exceptional" and "where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law").
10. Second, paragraph 20 provides a defence of reasonable excuse:

"(1) Liability to a penalty under any of paragraphs 1, 2, 3(1) and 4 does not arise in relation to an act or failure which is not deliberate if P satisfies HMRC or (on appeal) the First-tier Tribunal that there is a reasonable excuse for the act or failure.

(2) For the purposes of sub-paragraph (1) –

(a) an insufficiency of funds is not a reasonable excuse unless attributable to events outside P's control,

(b) where P relies on any other person to do anything, that is not a reasonable excuse unless P took reasonable care to avoid the relevant act or failure, and

(c) where P had a reasonable excuse for the relevant act or failure but the excuse had ceased, P is to be treated as having continued to have the excuse if the relevant act or failure is remedied without unreasonable delay after the excused ceased."

11. The underlying facts of the present case may be summarised as follows. The appellant is a wholesale dealer in alcoholic drinks. Between March 2012 and January 2013, it purchased excise goods from Galaxy Cash & Carry Limited (Galaxy). HMRC discovered that the goods had been apparently supplied to Galaxy by Vanguard Breweries. HMRC were aware that Galaxy had been dealing with "missing traders" and when officers visited the address of Vanguard Breweries, they found that it was wasteland on which there had once stood a pub which had burnt down. Galaxy had been unable to produce evidence of duty paid. HMRC concluded that excise duty had not been paid. They accepted that the goods had been delivered to the appellant by Galaxy, so that it was not the first person to have held and controlled the goods and accordingly was not liable for the excise duty on them. HMRC issued the penalty of £31,864.40 under paragraph 4(1) of schedule 41.
12. The appellant appealed against the penalty to the First-tier Tribunal (FtT) which dismissed the appeal. It rejected the submissions based on incompatibility with article 6 principally on the ground that appeals against penalties under paragraph 4(1) were not criminal proceedings for the purposes of article 6. On appeal, the Upper Tribunal held that that they were criminal proceedings for these purposes and HMRC have not challenged that decision.
13. The Upper Tribunal dismissed the appeal on the grounds that the reverse burden of proof on whether duty had been paid on the goods was compatible with article 6.
14. Article 6(2) provides that "Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law". The presumption of innocence is one of the elements of a fair criminal trial required by article 6(1).
15. It is common ground that, notwithstanding the bald terms in which article 6(2) is expressed, this right is not unqualified. In Salabiaku v France (1988) 13 EHRR 379, which concerned a provision of the French Customs code whereby any person in possession of smuggled goods was deemed responsible for customs evasion, the European Court of Human Rights (the Court) stated:

"28…Presumptions of fact or of law operate in every legal system. Clearly, the Convention does not prohibit such presumptions in principle. It does, however, require the contracting states to remain within certain limits in this respect as regards criminal law…Article 6(2) does not therefore regard presumptions of fact or of law provided for in the criminal law with indifference. It requires states to confine them within reasonable limits which take into account the importance of what is at stake and maintain the rights of the defence."

16. In Janosevic v Sweden (2002) 38 EHRR 473, the Court rejected a complaint that the imposition of tax surcharges was incompatible with article 6(2). Under Swedish tax law, a penalty could be imposed on a taxpayer who submitted incorrect information to the tax authority. The penalty in the case of income tax was 40% of the tax that would not have been collected if the tax authority had accepted the incorrect information. The imposition of a penalty did not depend on any intent or negligence on the part of the taxpayer. The burden of establishing that the taxpayer had supplied incorrect information lay on the tax authority.
17. There were provisions under which the penalty would not be imposed or would be remitted, for example, if the provision of incorrect information was excusable due to the nature of the information or other special circumstances or if the imposition would be manifestly unreasonable. The burden of proving that there was reason to cancel or remit a penalty lay on the taxpayer. As the Court remarked in its judgment at [100]:

"Consequently, the starting point for the tax authorities and courts must be that inaccuracies found in a tax assessment are due to an inexcusable act attributable to the taxpayer and that it is not manifestly unreasonable to impose a tax surcharge as a penalty for that act. The Swedish tax system thus operates with a presumption, which it is up to the taxpayer to rebut."

18. Applying its judgment in Salabiaku, the Court said at [101]:

"Thus, in employing presumptions in criminal law, the Contracting States are required to strike a balance between the importance of what is at stake and the rights of the defence; in other words, the means employed have to be reasonably proportionate to the legitimate aim sought to be achieved."

19. A principal ground of challenge by the applicant was that it was in practice very difficult for the taxpayer to rebut the presumption. While accepting that this was the case, the Court stated that it was nonetheless open to the trader to adduce evidence in support of a reduction or remission of the penalty, and observed that in the case before it the taxpayer had not in fact done so. The Court continued at [103]:

"The Court also has regard to the financial interests of the State in tax matters, taxes being the State's main source of income. A system of taxation principally based on information supplied by the taxpayer would not function properly without some form of sanction against the provision of incorrect or incomplete information, and the large number of tax returns that are processed annually coupled with the interest in ensuring a foreseeable and uniform application of such sanctions undoubtedly require that they be imposed according to standardised rules."

20. The Court stated its conclusion at [104]:

"In view of what has been stated above, in particular the fact that the relevant rules on tax surcharges provide certain means of defence based on subjective elements and that an efficient system of taxation is important to the State's financial interests, the Court considers that the presumptions applied in Swedish law with regard to surcharges are confined within reasonable limits."

21. Janosevic was one of the cases considered by the House of Lords in Sheldrake v DPP [2004] UKHL 43; [2005] 1 AC 264, in a combined appeal which considered presumptions against a defendant in two very different contexts, control of a motor vehicle having consumed more than the prescribed limit of alcohol and membership of a prescribed organisation contrary to the Terrorism Act 2000. Having reviewed the cases, Lord Bingham said at [21]:

"From this body of authority certain principles may be derived. The overriding concern is that a trial should be fair, and the presumption of innocence is a fundamental right directed to that end. The Convention does not outlaw presumptions of fact or law but requires that these should be kept within reasonable limits and should not be arbitrary. It is open to states to define the constituent elements of a criminal offence, excluding the requirement of mens rea. But the substance and effect of any presumption adverse to a defendant must be examined, and must be reasonable. Relevant to any judgment on reasonableness or proportionality will be the opportunity given to the defendant to rebut the presumption, maintenance of the rights of the defence, flexibility in application of the presumption, retention by the court of a power to assess the evidence, the importance of what is at stake and the difficulty which a prosecutor may face in the absence of a presumption. Security concerns do not absolve member states from their duty to observe basic standards of fairness. The justifiability of any infringement of the presumption of innocence cannot be resolved by any rule of thumb, but on examination of all the facts and circumstances of the particular provision as applied in the particular case."

22. At [31], Lord Bingham said: "The task of the court is never to decide whether a reverse burden should be imposed on a defendant but always to assess whether a burden enacted by Parliament unjustifiably infringes the presumption of innocence".
23. In the present case, the appellant emphasised in its evidence the difficulty of rebutting the presumption that duty had not been paid on the goods in question. In a witness statement made by Mr Balbir Singh Ghuman, a director of the appellant, he said:

"I have no methods available to me that I know of which would actually let me verify the duty status of these goods. There is no central register and there are no unique serial numbers on any of these products that I can check. A non-duty paid can of beer looks identical to a duty paid can. Even if I bought directly from someone I thought was the duty payer and they gave me proof of duty payment, I would have no way of verifying that document was actually related to the physical goods I was buying. HMRC have not suggested any methods of duty verification that I could have used."

24. Mr Ghuman said that the appellant had relied on the facts that the goods in question were not unduly cheap and that VAT had been charged on them. This latter point supported the impression that the appellant was buying duty paid stock because "[d]uty suspended stock does not incur VAT and I would have thought anyone selling illicit alcohol would either not invoice at all or at least not produce a proper VAT invoice". In his oral evidence to the FtT, Mr Ghuman said that he held a due diligence file relating to Galaxy, containing a copy of its certificate of incorporation and a copy of its director's driving licence. After HMRC's initial enquiries he made further checks and obtained various documents. He said in evidence that, because Galaxy's invoices to the appellant showed VAT to have been paid, he had assumed that duty had also been paid.
25. The FtT found, on the basis of Mr Ghuman's evidence, that the appellant did not make any specific enquiry of Galaxy whether duty had been paid but assumed that, because VAT was shown as paid, duty had also been paid. This was a fundamental failure and it found that there was no reasonable excuse for the failure to ask whether the duty had been paid. The appellant was not therefore entitled to rely on the defence under paragraph 20 of schedule 41. HMRC accepted that if proper due diligence had been carried out, it would have amounted to a reasonable excuse. The Upper Tribunal refused the appellant permission to appeal against these findings and conclusions. The FtT also found that there were no exceptional circumstances justifying a reduction or cancellation of the penalty, against which no permission to appeal was sought.
26. The Upper Tribunal accepted that there could be practical difficulties for a trader to prove that duty had been paid. It also accepted that, unlike the position in Janosevic, there was no requirement on the part of the trader to provide information and that, unlike the position of being in charge of a motor vehicle while in excess of the alcohol limit (where the burden of proving that there was no likelihood of the defendant driving the vehicle is on the defendant), it was not always obvious that the trader was better placed than HMRC to prove that duty had been paid.
27. The Upper Tribunal set out its analysis and conclusions as follows:

"39. In this case, in contrast to that of Janosevic, there is no requirement on the part of a person in the position of Euro Wines to provide information. What there is, however, is an effective requirement, having regard to the sanction of the penalty, for the recipient of goods to take reasonable steps to check that those goods are duty paid. That is reinforced by the defence of reasonable excuse. As well as that defence, there is an opportunity, according to the express terms of s 154 CEMA, for the person concerned to rebut the presumption that duty has not been paid. The penalty is also subject to reasonable mitigation, reflecting the "quality of the disclosure", namely whether the disclosure was prompted or unprompted, and the timing, nature and extent of the disclosure (see FA 2008, Sch 41, paras 12 and 13).

40. Although we accept, as submitted by Mr Bedenham, the difficulty of a trader in a chain of transactions in seeking to ascertain whether duty has been paid in all cases, such a difficulty is not, according to Janosevic, necessarily decisive of the question of incompatibility with Article 6(2). That difficulty has to be considered in the context of the scheme of the penalty provisions as a whole.

…

42. It is not in every case that the question resolves itself into which of the parties is best placed to prove a particular fact. The whole scheme of the relevant provisions must be considered. It is not possible, in our judgment, to conclude with the clarity that was available in Sheldrake, which out of HMRC or a trader in the position of Euro Wines, would be the appropriate party to prove the question of duty payment. It might in some cases be HMRC, and in others the trader."

28. In challenging this decision, Mr Bedenham on behalf of the appellant advanced three principal submissions.
29. First, it was submitted that the Upper Tribunal failed to recognise or to attach appropriate weight to the fact that HMRC had to conduct an investigation and confirm that duty was outstanding on the goods. Mr Bedenham drew attention to the terms of paragraph 4(1) of schedule 41 to the Finance Act 2008 which provides that a penalty is payable if "a payment of duty is outstanding and has not been deferred" at the time that the trader acquires possession of the goods or is concerned in their carriage etc. This requires HMRC to be satisfied that this is the case, which normally they do by tracking ownership back through the supply chain, using sale and purchase documentation. In these circumstances, HMRC is the appropriate party to prove that duty has not been paid.
30. Second, the Upper Tribunal did not have proper regard to the insurmountable difficulty for the trader in proving that duty had been paid. While HMRC has statutory powers to compel traders to disclose their supplier, enabling them to track back through the supply chain, a trader has no such power and is likely to face great resistance from suppliers to providing this commercially sensitive information. The longer the supply chain, the greater the difficulties facing traders. Even if a trader could obtain this information, it is only HMRC who can say for certain that duty was paid.
31. Third, having regard to those difficulties, the Upper Tribunal attached disproportionate weight to the defence of reasonable excuse and to the effective requirement that the trader take reasonable steps to check that duty has been paid.
32. The compatibility with article 6(2) of the reverse burden of proof on the payment of duty depends, as Lord Bingham said in Sheldrake at [21]: "on examination of all the facts and circumstances of the particular provision in the particular case".
33. In my judgment, a consideration of the factors relevant to this particular reverse burden lead to a clear conclusion that it is compatible with article 6(2).
34. First, the context is important. Although the penalty is treated as criminal for the purposes of article 6(2), it is essentially a regulatory penalty which is not dependant on proof of any fault on the part of the trader. It does not involve any moral or social stigma. This was considered relevant by Lord Bingham in Sheldrake where at [21] he referred to "the importance of what is at stake". This refers back to what he said about absolute offences at [6]. Referring to offences found in legislation regulating the conduct of economic and social life, Lord Bingham said: "Offences against such regulations are often regarded as not truly criminal, since the penalty inflicted is not dire and little or no stigma attaches to conviction." This may be said to apply with greater force in a case such as the present where the penalty is not, as a matter of domestic law, criminal at all.
35. A further feature of the context is that the class of persons on whom a penalty may be imposed are traders in duty goods. They have chosen to carry on business in a sector where the payment of duty is a factor of the highest importance and where, as they know, they are exposed to the risk of penalties in certain circumstances. Their position is rather different from the ordinary taxpayer who may nonetheless be exposed to penalties to which a reverse burden applies under the Swedish tax system.
36. This point too was discussed in Sheldrake. Lord Bingham referred at [27] to the decision of the House of Lords in R v Johnstone [2003] UKHL 28; [2003] 1 WLR 1736 concerning a conviction for the possession of a large quantity of bootleg recordings contrary to section 92 of the Trade Marks Act 1994. The Act provided that it was a defence to show that the defendant believed on reasonable grounds that the offending use of a trade mark was not an infringement of the trade mark. Giving the lead judgment in that case, Lord Nicholls of Birkenhead said at [52] that

"Those who trade in brand products are aware of the need to be on guard against counterfeit goods. They are aware of the need to deal with reputable suppliers and keep records and of the risks they take if they do not."

37. Commenting on R v Johnstone, Lord Bingham said in Sheldrake that offences under section 92 are committed by "dealers, traders, market operators, who could reasonably be expected (as Lord Nicholls pointed out) to exercise some care about the provenance of goods in which they deal". The parallel with the present case is obvious.
38. Against this context, it is highly significant that the trader can, first, seek to rebut the presumption that duty was not paid and, secondly, show that he undertook due diligence as regards the supply of the goods and thereby show that he has a reasonable excuse.
39. Mr Bedenham submitted that a trader faces great difficulties in rebutting the presumption and that HMRC is in a better position to demonstrate that duty has not been paid. The difficulty in rebutting a presumption was held to be insufficient in Janosevic to render the reverse burden in that case incompatible with article 6(2). In any event, the Upper Tribunal in this case concluded that it was not possible to conclude with clarity which out of the trader or HMRC would be the appropriate person to prove the question of duty payment; it all depends on the circumstances of individual cases. I see no reason to disagree with this assessment.
40. What is undeniable is that traders are in a good position, and it should be part of the routine conduct of their business, to undertake due diligence as regards the provenance of goods purchased by them. As the Upper Tribunal said at [42]:

"Nevertheless, who is in the best position, when carrying out its own trade, to know the circumstances of that trade. In every case a trader who is at the point of acquiring dutiable goods has the opportunity to take steps in order to satisfy itself about whether duty has been paid before going ahead. A trader who goes ahead without being satisfied knows or ought to know it is at risk. A trader in that situation can avoid the risk entirely by refusing to take such goods."

41. Due diligence is not foolproof. There will be occasions when, notwithstanding the reasonable steps taken by a trader, it transpires that duty has not been paid on goods purchased by him. In such a case, the trader will establish the defence of reasonable excuse.
42. In circumstances where the evasion of duty is a longstanding problem, with serious consequences for the public finances, it is, in my view, reasonable and proportionate that some burden is cast on traders to take reasonable steps to satisfy themselves that duty has been paid on stock purchased by them.
43. I should note a further submission made by Mr Bedenham, that while it may in some circumstances be right to reverse the burden of proof in relation to a defence, it cannot be right to do so as regards an essential element of the offence and in none of the cases has such a reverse burden been held to be compatible with article 6(2). Mr Bedenham modified this submission by accepting that a reverse burden might be compatible where the relevant element of the offence was within the sole knowledge of the defendant. There is nothing in the decisions of the Court or in the judgments in Sheldrake to justify this distinction. It would be formalistic to say that, while a reverse burden in relation to a defence may be compatible, it can either never be compatible as regards an element of the offence or can be compatible only when the relevant facts are within the sole knowledge of the defendant. It is always a question of examining the reverse burden in its particular context and determining whether it is reasonable and proportionate.
44. For these reasons, which in large part reflect those of the Upper Tribunal, I would dismiss this appeal.

Lord Justice Patten

45. I agree.

Lady Justice Gloster

46. I also agree.