England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		16 July 2009

Kenneth Parker QC, sitting as a deputy High Court judge:

Introduction

1. In these proceedings the Claimants challenge the decision of the Defendant, the Commissioners for HM Revenue and Customs ("HMRC") to abolish entitlement to "drawback" for alcoholic liquors under warehousing for export arrangements ("WFE"). The drawback system provides for the repayment by HMRC of excise duty that has been paid on alcoholic goods released for consumption in the United Kingdom where the goods are to be exported to other Member States of the European Union.
2. WFE was abolished by The Excise Goods (Drawback) (Amendment) Regulations 2009 (SI 2009/1023) ("the 2009 Regulations"). The 2009 Regulations were made and laid before Parliament on 22 April 2009 and came into effect on 1 June 2009.
3. The First and Eighth Claimant companies operate bonded warehouses which receive, store and export goods under WFE. The Second to Seventh Claimants are traders in alcoholic goods who export such goods to purchasers in other Member States of the EU.
4. HMRC decided to abolish WFE because it believed that WFE gave rise to fraudulent claims to drawback, estimated to be running currently at about £20 million each year, and to distortion in the wholesale and retail supply of alcoholic liquors, especially beer, in the United Kingdom. The Claimants contend that the decision adversely affects their legitimate business of supplying beer to purchasers in other Member States of the EU, and is, on a number of grounds, unlawful.
5. On 3 June 2009 Mrs Justice Dobbs ordered the application for interim relief claimed in the present proceedings to be listed in open court as soon as possible. The matter came before me on 15 June 2009, and I directed that there should be a "rolled up" one-day hearing of the application for permission, to be held on 18 June 2009, at which the application for interim relief could also be considered. At the end of the hearing I refused an application for interim relief and reserved judgment, indicating that I would hand down a judgment on the substantive issues as soon as practicable.

Background

6. Alcoholic liquor produced in (or imported into) the United Kingdom becomes in principle liable to excise duty when it is produced (usually at the moment that it is put into any package or removed from the brewery or imported): section 36(1) of the Alcoholic Liquor Duties Act 1979 ("ALDA"). However, liability to pay the duty is delayed and arises only when the alcoholic liquor passes the "duty point". The "duty point" is usually the point at which the alcoholic liquor is released for consumption, as specified by Article 6 of Council Directive 12/92/EEC on the "General Arrangements for Products Subject to Excise Duty and on the Holding, Movement and Monitoring of such Products" ("the Directive").
7. The current rate of duty on beer is £16.47 per hectolitre per cent of alcohol in the beer. That would represent about £9.88 on a case of 24 500 ml cans of beer with a 5 per cent alcohol content.
8. However, the duty point may be postponed and the alcoholic liquor may remain duty suspended if it is to be removed to other registered premises or to an excise warehouse, in accordance with the conditions of control specified in relevant HMRC public notices, in particular, Notice 197: section 41A ALDA. A brewer may supply alcoholic liquor under such duty suspension arrangements only to a registered warehousekeeper or to an owner of excise goods approved and registered as such by HMRC under The Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (SI 199/1278). The brewer is also of course concerned to ensure that the person to whom goods are supplied under duty suspension arrangements is creditworthy and can be relied upon to comply with the obligations inherent in such arrangements.
9. Goods in duty suspension may be exported, either to other Member States of the EU or to third countries, and UK excise duty does not in that event become payable at any point.
10. If goods are not held in duty suspension, duty will be paid on them. The duty drawback system then allows traders to claim repayment of excise duty on duty paid alcohol that is exported. This is called "drawback". For present purposes there are two types of drawback claim: first, direct dispatch or direct export; and, secondly, WFE.
11. The direct export arrangements follow Article 7 of the Directive and have been in operation from 1 January 1993, when the single market came into effect. For export to other Member States the Directive authorises reimbursement of excise duty in the Member State of export upon proof of the duty having been paid in that Member State, and of the goods having been received and duty paid, or secured, in the Member State of importation. For exports to third countries excise duty is repayable upon proof of excise duty having been originally paid and of subsequent export from the EU. The procedure for direct export is set out in detail at paragraphs 8-10 of the witness statement filed in these proceedings by the appropriate official of HMRC, Nicholas John Sands. Mr Sands also states that the procedures from export of goods to the making of a drawback claim could be completed in less than one month. HMRC then seeks to decide the claim within 30 days.
12. WFE was introduced in 1995 by The Excise Goods (Duty) Regulations 1995 (SI 1995/1046) ("the 1995 Regulations"). Under WFE, traders may claim reimbursement of duty from HMRC where they intend to export the goods to another Member State or to a third country. The goods are placed in an excise warehouse, and so returned to duty suspension, and the duty is reimbursed in that event before the goods are in fact exported. WFE has an obvious cash flow advantage over direct export drawback. Under the latter the trader must fund the amount of excise duty which is comprised in the purchase price of the goods until the goods have been exported, foreign excise duty has been paid or secured and all the formalities have been completed. Under WFE the UK excise duty is repaid once the trader has formed an intention to export the goods, the goods have been placed in an excise warehouse and all the necessary formalities have been completed.
13. The procedure for WFE drawback is set out in detail at paragraph 5 of Mr Sands' witness statement. Mr Sands also notes that the goods must be removed from the registered warehouse within 6 months of making the claim for WFE drawback, and that HMRC has the right to recover the drawback payment if there is a failure to export.
14. According to an analysis made by HMRC of the drawback claims made by the top 10 drawback claimants in the last 12 months, £11,219,212 was paid in respect of drawback claims for Carling beer, a popular brand in the UK, comprising about 23 per cent of all WFE drawback claims for beer.
15. WFE drawback is authorised under Article 22 of the Directive.
16. Drawback is prone to fraud. One species is diversion fraud. This occurs when goods are consigned under duty suspension arrangements from an approved UK tax warehouse to an approved tax warehouse or persons authorised to receive the goods in another Member State in accordance with Article 16 of the Directive, and the goods are diverted to the UK market without payment of UK duty and VAT. At paragraphs 20 to 21 of his witness statement Mr Sands describes a typical example of the modus operandi of such a diversion fraud.
17. In the fiscal year 2001/2002 drawback claims (that is, both WFE and direct export) in respect of beer were £1.73 million, of which £1.13 million were claims under WFE. In the fiscal year 2005/2006 total drawback claims in respect of beer had risen to £26.15 million, of which £20.12 million were made under WFE. In other words, nearly 78 per cent of the increase in total drawback claims was attributable to WFE claims. HMRC was concerned that there was substantial fraud in the operation of WFE and in June 2006 HMRC consulted businesses and appropriate trade associations on the arrangements for duty drawback and on possible options for reform.
18. The consultation document suggested two options for reform, namely, abolishing WFE (Option A) and extending the period of notice within WFE (Option B). The consultation document asked consultees five specific questions about Option A, with a view to gathering relevant information about, among other things, the likely benefits and costs of abolition of WFE.
19. The consultation document was distributed through the Internet on HMRC's webpage and was advertised in "Excise News", a publication sent to all relevant trade associations and warehousekeepers. Hard copies of the consultation document were also sent to most, if not all, traders who had made drawback claims. HMRC received 24 responses to the consultation. Of the present Claimants, the Second and Third Claimants responded.
20. The responses to the consultation were summarised in a document which was published with the Budget 2007. In the light of the responses received in the consultation HMRC decided for the time being not to abolish WFE. Instead HMRC imposed more rigorous evidential requirements on those making claims for drawback, with a view to combating missing trader fraud rather than diversion fraud as such. On 21 March 2007 HMRC set out new guidance in the Budget edition of Excise News, produced in June 2007 a revised version of Notice 207 (Excise Duty: Drawback), and wrote to drawback claimants about the changes. In the relevant edition of Excise News HMRC stated:

"HMRC continue to monitor the usage of the drawback system closely, and although we are not taking them forward at this time, options for further reform remain under review, including the Government's lead option in the consultation – abolishing the warehouse for export provisions."

21. The value of WFE claims between May 2006 and October 2006 was £18 million. Following the introduction of stricter evidential requirements, the amount of claims for the same period in 2007 fell to £8 million. However, for the fiscal year 2008/2009 total drawback paid in respect of beer had increased very substantially to £54.49 million, of which £48.14 million was paid under WFE. Between 2005/2006 and 2008/2009 the increase in WFE drawback claims in respect of beer (£28.02 million) represented nearly 99 per cent of the increase in total drawback claims (£28.34 million) in respect of beer.
22. In the budget for 2009 (22 April 2009) the Government announced that WFE provisions for alcoholic liquors would be withdrawn with effect from 1 June 2009. A supplementary document, entitled "Impact Assessment of Withholding Warehousing for Export for Claimants of Drawback", was published with the budget announcement. Under the heading "Competition assessment /small firms impact test", the following appeared:

"22.The main beneficiaries of these changes will be SME UK wholesalers and retailers trading legitimately in the UK market. It should reduce unfair competition for those businesses currently competing with black market traders thus creating a level playing field. We estimate that the retail value of trade expected to transfer to legitimate businesses will be £60 million in the first year.

23. For legitimate businesses currently operating WFE there will be an impact but we judge that this will be marginal for most businesses for which WFE is not a core business activity. As an alternative, businesses will be able to use the "direct export" drawback scheme where UK duty is repaid only after evidence of duty payments in another member state. Although inherently more secure from a revenue point, this system does place certain additional requirements on businesses. HMRC will work with them, taking a pragmatic approach, to make it as simple to work as possible."

23. The 2009 Regulations give effect to that decision.

Relevant legislative provisions

24. Section 2 of the Finance (No 2) Act 1992 ("the Finance Act") provides, so far as is relevant:

2. Power to provide for drawback of excise duty

(1) Subject to the following provisions of this section, the Commissioners may, in relation to any duties of excise, by regulations make provision

(a) conferring an entitlement of drawback of duty in prescribed cases where the Commissioners are satisfied that goods chargeable with duty have not been, and will not be, consumed in the United Kingdom and

(b) conferring an entitlement to drawback of duty, in prescribed cases, on shipment as stores, or warehousing in an excise warehouse for use as stores, of goods chargeable with duty.

(2) The power of the Commissioners to make regulations under this section shall include power –

(a) to provide for, or for the imposition of, the conditions to which an entitlement to drawback under the regulations is to be subject;

(b) to provide for the determination of the person on whom any such entitlement is conferred;

(c) to make different provision for different cases, including different provision for different duties and different goods; and

(d) to make such incidental, supplemental, consequential and transitional provision as the Commissioners think necessary or expedient.

(3) Without prejudice to the generality of subsection (2)(d) above, the power of the Commissioners to make regulations under this section shall include power, in relation to any drawback of duty to which any person is entitled by virtue of regulations under this section, to provide –

(a) for the entitlement to the drawback to be cancelled at any time after it has been conferred if there is a contravention of any conditions to which it is subject or in such other circumstances as may be prescribed; and

(b) for such person as may be prescribed to be liable to the Commissioners for sums paid or credited to any person in respect of any drawback that has been cancelled in accordance with any such regulations.

(3A) If entitlement to drawback is cancelled under any provision contained in regulations by virtue of subsection (3) above, the Commissioners –

(a) may assess as being excise duty due from the prescribed person an amount equal to sums paid or credited to any person in respect of the drawback, and

(b) may notify the prescribed person or his representative accordingly.

(3B) The reference in subsection (3A) above to the prescribed person is to such person as may be prescribed for the purposes of the subsection by regulations under this section.

(4) The power of the Commissioners to make regulations under this section shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of either House of Parliament.

25. Pursuant to section 2 of the Act, HMRC made the 1995 Regulations, which provide so far as is relevant:

3 Application

These Regulations apply to goods chargeable with a duty of excise provided that those goods have not been, and will not be, consumed in the United Kingdom or the Isle of Man.

…

5 Eligible goods

(1) A claim for drawback may only be made in relation to eligible goods.

(2) Subject to paragraphs (3) and (4) above, goods are eligible goods if duty has been paid and has not been remitted, repaid or drawn back and those goods have been –

(a) exported,

(b) warehoused for export, or

(c) destroyed.

…..

6 Eligible claimants

(1) A claim for drawback may only be made by an eligible claimant.

(2) A claimant is an eligible claimant if he is a revenue trader –

(a) in the course of whose business the export, removal to warehouse for export or, as the case may be, destruction took place; and…

26. The 2009 Regulations (regulation 3) amend the 1995 Regulations by inserting the following into regulation 5 of the 1995 Regulations:

"(5) Alcoholic liquors are not eligible goods for the purposes of paragraph 2(b) if they become warehoused for export on or after 1^st June 2009.

(6) In paragraph (5) "alcoholic liquors" means the alcoholic liquors that are chargeable with duty under the Alcoholic Liquor Duties Act 1979."

27. Thus the effect of the 2009 Regulations is that no drawback claim may be made for any alcoholic liquor warehoused for export on or after 1 June 2009.

The Grounds of Challenge

28. There are in substance three grounds of challenge. First, it is contended that, in taking the decision to abolish WFE, HMRC failed to have regard to relevant considerations; and that such failure vitiated the decision, leading inescapably to the invalidity of the 2009 Regulations. Secondly, the Claimants submit that HMRC was under a duty to carry out a further consultation before abolishing WFE, and that the failure to do so again invalidated the 2009 Regulations. Thirdly, it is claimed that the abolition of WFE infringed the free movement provisions of the EU Treaty.

The First Ground

29. It is important to bear in mind the relevant legal context. Section 2 of the Finance Act confers wide powers of economic management on HMRC. It is common ground that section 2 imposed no duty upon HMRC to introduce WFE. There could have been no legal challenge if HMRC had declined to enact such arrangements. That would have been the case, even if it could have been shown that without them certain commercial opportunities might have been foreclosed to legitimate enterprises, or that competition in the wholesale supply of beer to other Member States of the EU might have been less vigorous. The abolition of WFE was a measure of economic management. HMRC took the decision in order to combat what it perceived to be very substantial fraud in cross-border trade, leading to heavy loss of excise duty and distortion of competition in relevant markets, recognising explicitly that the decision could to a certain degree adversely affect legitimate trade. The decision required HMRC to assess complex economic and commercial factors, and to strike an informed and rational balance between competing interests. It is trite law that the Court will require clear and convincing grounds to justify interference with such a decision.
30. I turn to consider the specific criticisms of the decision under challenge.
31. First, it is contended that HMRC failed to appreciate, and to give due weight to the fact, that abolition of WFE would significantly reduce, if not eliminate altogether, the cross-border supplies that currently benefit from WFE and that could reasonably be expected to continue in the future, perhaps at even increased levels. This argument focuses on the position of purchasers, particularly purchasers in other Member States.
32. Drawback claims under the alternative direct export arrangements require purchasers in other Member States to pay the appropriate foreign excise duty at, or before, importation into the Member State in question. This requirement might impact unfavourably on the foreign purchaser. If the foreign purchaser could otherwise buy goods from suppliers in the UK or elsewhere in duty suspension, the payment of the foreign excise duty would be deferred until the foreign purchaser removed the goods from a bonded warehouse for domestic consumption. By purchasing goods under direct export arrangements, the foreign purchaser would have to carry the cost of the earlier payment of foreign excise duty. The extent of such cost would obviously depend on the volumes purchased, the amount of the foreign excise duty, the period for which the goods would otherwise have been retained in store in duty suspension before release for consumption, and the implicit interest expense of carrying the cost of the foreign excise duty for that period.
33. In some circumstances the foreign purchaser might not release the goods at all for domestic consumption, but rather supply them from a bonded warehouse to a purchaser in another Member State or in a third country. If the foreign purchaser had already paid excise duty on the goods (as required by direct export arrangements), he would have to make a drawback claim to his own customs authorities. The making of such a claim would involve additional work, and there would be some delay in receiving reimbursement of the duty paid on goods destined for export.
34. During the 2006 consultation the British Beer & Pub Association ("the BBPA"), a trade body representing the interests of the producers of 98 per cent of beer brewed in the UK and operators of 60 per cent of the public houses in the UK, drew attention to this aspect of the direct export arrangements:

"In such circumstances, the direct dispatch scheme is not a viable alternative for a number of reasons. Firstly, the customer may wish to hold the goods in duty suspension in their tax warehouse. Some member companies EU customer only purchase duty suspended stock. Secondly, the customer may not want to pay duty in his state for goods that he has yet to receive, both for cash flow reasons and also because he may not want to get involved in the administrative burden this scheme entails."

35. In the Summary of Consultation Responses, HMRC referred to this matter as follows:

"2.9 A number of respondents explained that customers in other EU member states often preferred to receive goods in duty suspension. However, the removal of the WFE option would mean that there was no means for goods on which UK duty had been paid to be sent in duty suspension to a tax warehouse in another member State, as the "direct dispatch" system requires proof of duty payment in the member state of destination before drawback can be paid. This, it was claimed, would restrict trade within the EU and be anti-competitive, and could result in alcohol being sourced from outside the UK, having an impact on the UK"

36. In the Impact Assessment, under the heading "Costs and Benefits and Impacts", the following appeared:

"10……HMRC impact estimates are therefore based on the following assumptions

….

….

if the measure is introduced, all businesses making legitimate WFE claims will continue to make the same monthly number and value of claims using the direct export drawback regime."

37. It does appear, therefore, that in making the impact assessment HMRC did not proceed on the basis that, if WFE were abolished, legitimate cross-border supplies of beer would be significantly reduced or that revenues from such supplies would be significantly lower. HMRC, therefore, discounted the matter under consideration.
38. Although it might have been preferable if HMRC had specifically addressed this matter in the Impact Assessment, the relevant legal issue is whether the failure to do so and the implicit rejection of the point in question vitiated the decision to abolish WFE. In my view, it did not. On an objective analysis the alleged impact was highly speculative and, on the information available, not capable in any event of reliable quantification, for the following reasons.
39. First, notwithstanding the alleged difficulties of direct export, there were in fact very substantial drawback claims made under those arrangements. Exhibited to Mr Sands' witness statement was a table which showed, among other things, drawback claims under direct export for the period April 2008 – March 2009. One trader had claimed drawback of over £1.2 million, another had claimed drawback of over £0.5 million, and other traders had claimed smaller, but not insignificant, amounts.
40. Secondly, the point in question had not featured strongly in the consultation responses. Apart from the BBPA (see paragraph 34 above), other respondents had either not mentioned the point at all, or had made no more than passing reference to it.
41. Thirdly, it was unclear how much trade might be affected in the manner alleged, and what the precise impact might be. For example, there was no information about the period for which EU customers might on average hold stock before releasing it for consumption, or about the length of time that it might take to process drawback claims in other Member States, and, therefore, about any incremental costs likely to be incurred by reason of earlier payment of foreign excise duty. From evidence filed in these proceedings it does seem that excise duty on beer in France (to which a large volume of WFE claims relate) is very much lower than in the UK. During the consultation the respondents, with their commercial knowledge of cross-border trading, had at least the opportunity to provide necessary information bearing on the relevant point to HMRC, but, as far as I can ascertain, they did not do so.
42. Without some reliable estimate of the costs to which I have referred, I cannot see how the economic impact, if any, could sensibly have been evaluated. If, for example, the amounts of excise duty were comparatively modest, the stockholding periods relatively short and the implicit interest cost of carrying the amount of duty paid relatively low (in the Eurozone), the effect on the quantities supplied to EU purchasers by UK traders and on the revenues received by them from such supplies might well be negligible.
43. Finally, in the present context it is also important to bear in mind that all the trader Claimants in this case were qualified to purchase beer in duty suspension and could, therefore, seek to mitigate any adverse effect by purchasing such beer to meet demand from EU customers who might be reluctant to purchase duty paid beer at current prices. The Claimants contend that they have difficulty in obtaining beer in duty suspension from brewers or large wholesalers, and that the price of duty paid beer is in any event lower than the price of beer in duty suspension. However, HMRC do not accept that this is the case. Mr Sands, drawing on the experience of Paul Jepson, the HMRC Client Relation Manager for a number of breweries, states that "breweries will supply to any business under suspension arrangements provided that the business meets correctness criteria set in both our law (i.e. Regulation 5 Warehousekeepers and Owners of Warehoused Goods Regulations 1999) and by the industry (for example the usual customer credit worthiness checks and to ensure that his liability for removals from his brewery under suspension arrangements are correctly discharged" (paragraph 73 of his witness statement).
44. Relying on further information from Mr Jepson, Mr Sands also states that breweries sell beer at the same unit price (i.e. without tax) whether it is sold duty paid or under duty suspension arrangements. Breweries do offer incentives to purchasers of large volumes of beer, including contingency discounts paid to those clients who meet agreed volume targets. It is also notable that the consultation response from the BBPA does not refer to the alleged price differential. In explaining the commercial reasons for using WFE, the BBPA response gives the impression that WFE transactions arise from unintended and fairly marginal stock shortages of beer in duty suspension.
45. I am not able to reject HMRC's evidence on this issue, particularly as the alleged difficulties in buying beer in duty suspension are said by the Claimants to arise because both brewers and leading wholesalers are restricting supplies to prevent parallel imports into other Member States, with a view to maintaining price differentials and supporting existing channels of distribution. Such conduct on the part of major established enterprises would be a flagrant violation of competition law and would merit investigation by the competition authorities. But it is not a matter upon which I could safely reach any conclusion on the material before me in these proceedings. Similarly, the alleged difference in the price of beer, depending upon whether the beer is to be retained in duty suspension or is to be released for consumption with payment of excise duty, appears to lack any obvious economic rationale.
46. In the present context I also note that the Impact Assessment specifically stated that the policy upon which the abolition of WFE was predicated would be reviewed to establish the actual costs and benefits and the achievement of the desired effect. HMRC, therefore, recognised that there was an element of uncertainty in its assessment of costs, and allowed an opportunity of review, including, if appropriate, review of the matter now under consideration. This would appear to be a pragmatic and rational approach.
47. For the above reasons I reject the first criticism of the decision.
48. The second criticism is that HMRC seriously underestimated the cash flow disadvantages to the Claimants of the direct export arrangements.
49. From the consultation it emerged that the majority of consultees did not warehouse goods for more than 4 to 7 days. It is clearly more difficult to estimate the average time that would be required to obtain from the purchaser in another Member State the necessary proof that foreign excise duty had been paid, for the period in question would depend both upon the efficiency of procedures agreed between buyer and seller and also upon the time taken by the responsible authority in the other Member State to issue documentary proof that excise duty had been paid. Such authorities are, of course, obliged by EU law to facilitate inter state trade and not to impede it by operating dilatory customs procedures. As I have mentioned, there was evidence before HMRC that the process from dispatch of goods to another Member State to submission of claim could be completed in less than a month.
50. In the Impact Assessment HMRC did seek to identify the incremental cost to legitimate trade that would be caused by the time needed to receive proof that foreign excise duty had been paid (paragraph 13). Given the relatively short period of stockholding before dispatch (see above), that element appears to have been discounted in the calculation. The actual calculation assumes legitimate drawback claims of £30 million each year, and an additional funding cost of £43,000 based upon a 14 day period of delay and an annual interest rate of 3.5 per cent.
51. It might appear that the assumed period of 14 days in which to obtain proof that the foreign duty had been paid would represent a very tight timetable, particularly in the light of evidence that claims were in fact taking longer than 14 days for suppliers to process. However, HMRC was committed to assist traders to operate the direct export arrangements as efficiently as possible, in the light of the abolition of WFE. For example, on 26 May 2009 HMRC officials met with traders to discuss the operation of direct export arrangements.
52. In these circumstances I cannot treat the 14-day period that was assumed in the calculation as manifestly unreasonable. In any event this issue must be kept in perspective. Even if a substantially longer period (say, 28 days) had been assumed, the annual interest cost (£86,000) would have represented only about 0.3 per cent of relevant annual drawback claims (£30 million). That would have remained a relatively small cost measured against the elimination of fraud estimated to be running at about £20 million each year and the removal of substantial distortion of competition in the relevant markets.
53. For these reasons I reject also the second criticism of the decision.
54. The third criticism is that HMRC misunderstood the reasons why WFE claims had increased from 2001/2002, and so had grossly overestimated the level of fraudulent drawback claims under WFE.
55. HMRC estimated the level of fraud as follows. Following the introduction of stricter controls in the light of the 2006 consultation, drawback claims under WFE for the 6 month period between May 2007 and October 2007 were £8 million. HMRC believed that an annualised amount of £16 million represented the broad level of legitimate claims. However, in the 6 month period May 2008 – October 2008 WFE drawback claims had again increased to £21 million, representing an annualised level of about £42 million. (The actual amount for the fiscal year 2008/2009 turned out to be even higher at £48.14 million). Accordingly, HMRC treated about £25 million of current drawback claims as fraudulent.
56. HMRC, therefore, concluded:

"This gives rise to an estimated loss of duty revenue in 2008/2009 of £25 million. Trends indicate that this would be likely to rise to £30 million in 2009/2010 if no action is taken. Not all of the £30 million potential revenue loss would result in additional revenue collected by HMRC, because there would be a degree of displacement to other types of fraud and the higher price of duty paid alcohol would reduce consumption to an extent. After allowing for these factors, HMRC estimates that excise duty will be £20 million higher than forecast in 2009/2010 if the measure is introduced with these savings forecast to fall to £10 million thereafter. HMRC estimates that an additional £5 million of revenue per annum would be at risk due to increases in WFE drawback fraud from 2009/10 onwards if no action is taken." (paragraph 12 of the Impact Assessment).

57. Using that estimate HMRC also calculated the benefits to competition as follows:

"HMRC expects there to be benefits to legitimate retail and wholesale sector as a result of the reduction in unfair competition from those currently trading in non-duty paid beer. The estimated revenue savings would translate into an increase in legitimate trade to the retail value of around £60 million. However the complex nature of the supply chain both for legitimate and fraudulent trade in alcohol means that it is not possible to quantify the net benefits to these sectors."

58. In essence the claimants attack these estimates by asserting that the increase in WFE drawback claims represents legitimate, non-fraudulent trade. However, in his witness statement Mr Sands states:

"As was the case in 2006, there is no obvious logical or commercial rationale for this exponential rise in WFE drawback claims. Investigation into the cross-border shopping market revealed that there has been a steady decline in this market since 2003, as opposed to a steep increase in UK beer exports to the EU. This is illustrated in a graph and table in a PowerPoint presentation that my colleague, Peter Latham, recently gave to representatives of the major UK brewers about the renewal of the Tackling Alcohol Fraud Strategy in May 2009." (paragraph 45)

59. Mr Sands also notes that "the majority of these claims have been for lagers that are popular in the UK, in quantities for which there is no obvious legitimate increase in the non-UK market." (paragraph 44).
60. As I understand it, the Claimants do not contend that the continental demand in general for British beer has increased in the period beginning 2001/02 and that they have been beneficiaries of any such increase in demand. Mr Grodzinski, counsel on behalf of the Claimants, did suggest, with some diffidence, that the fairly recent fall in the value of sterling against the euro might account for a general increase in cross-border trade. However, there are two rather obvious difficulties with that suggestion. First, the depreciation of sterling cannot explain the rapid growth in drawback claims for the period 2001/02 – 2005/06, in particular, the increase to £20.12 million in 2005/06. Secondly, if the depreciation of sterling were a partial explanation, it is surprising that drawback claims for spirits and wine, although steadily rising during the period ending March 2008, fell in the fiscal year 2008/09, when sterling has weakened.
61. It seems to me that the Claimants' real contention is that cross-border supplies of beer upon which duty was at one point paid and was later reclaimed under WFE drawback have replaced cross-border supplies of beer upon which excise duty has at no point been paid. The EU purchaser, whether wholesaler or retailer, has, it is said, switched its source of supply.
62. There would appear to be no reason why the EU purchaser would switch in this manner if the supplier did not offer more competitive terms, particularly as regards price. However, HMRC do not accept that the unit price of beer, duty paid, is significantly lower than the price of beer in duty suspension (see paragraphs 44 and 45 above). If HMRC is correct, and duty-paid beer has no inherent price advantage, it is very difficult to see how UK traders, acquiring and re-selling duty paid beer, would be able to expand their sales to EU purchasers to the extent that the large increases in WFE drawback claims indicate. For the reasons already given, I cannot reject the evidence of HMRC on the issue of alleged price differences, especially as there is no clear economic rationale for such differences. On that basis it appears to me that there is no convincing material upon which I could properly hold that HMRC had no rational grounds for concluding that there was no satisfactory objective reason for the very large increases in WFE drawback claims in respect of beer.
63. Finally, I should mention in this context a point made by Mr Grodzinski at the hearing. The calculations of HMRC assume that for the year 2008 only £16 million WFE drawback claims represented legitimate trade. For that year the Claimants made WFE drawback claims of £30 million, all of which were paid by HMRC. It was submitted that it was, therefore, irrational to treat at least £14 million of the Claimants' drawback claims as fraudulent, when those claims had not been questioned.
64. However, this submission confuses two different issues. The decision to abolish WFE was based upon an objective evaluation of the relevant market. There was no explanation of why WFE drawback claims had increased at the rapid rate disclosed by the data. In the absence of such an explanation, HMRC drew the conclusion that only about £16 million of the WFE claims could represent legitimate trade. In my view, that conclusion was rational and justifiable.
65. On the other hand, it is notoriously difficult to prove fraud in any individual case. Indeed, if HMRC could readily ascertain which claims were fraudulent, and could show to the requisite level of proof that they were fraudulent, it is doubtful whether it would have been necessary to abolish WFE. It is precisely because HMRC cannot readily distinguish genuine from fraudulent transactions, and meet the requisite level of proof, that abolition of WFE, at least for the time being, was judged by HMRC to be necessary.
66. The fourth criticism of the decision is that HMRC could not rationally conclude that abolition of WFE would substantially reduce the incidence of fraudulent drawback claims.
67. In his witness statement Mr Sands stated:

"In a duty paid system, there is control by the revenue authorities at both ends of the chain. Because it is not a system operated wholly and exclusively by businesses the revenue risk is reduced – it is not zero, but the incentive to fraud is much reduced and the opportunities to commit fraud are reduced. In his landmark report "The collection of excise duties in HM Customs and Excise" presented to Parliament in July 2001, Mr John Roques said – at paragraph 3.8.2:

As a control system, the AAD [for duty suspended movements] is fatally flawed as it will only work satisfactorily if all the parties involved are honest. It is therefore not a system of control".

With duty paid movements, there is a greater system of control." (paragraph 82)

68. In his witness statement for the Claimants Mr White, the Principal Sales Manager of the First Claimant, gave examples of how a fraudster, by using "phantom " freight or by operating a "carousel" scheme, could exploit even the direct export arrangements. However, in the Impact Assessment, HMRC did acknowledge such risks. Under the heading "Caveats and Risks", HMRC said:

"There remains a risk (over time) that criminal gangs could adapt and establish new networks/warehouses in other Member States to legitimise movements through the alternative "direct export" drawback scheme, where UK duty is repaid only after evidence of duty payment in another member state is provided, and that fraudulent repayment levels may arise. But the "direct export" system is inherently more secure and it will be more difficult for the would-be fraudster to abuse that system. But we shall be monitoring the position very closely and keeping it under review." (paragraph 21).

69. It seems to me that on this issue I must proceed cautiously. HMRC has experience accumulated over many years of tackling fraud in this area, and has an operational understanding of the likely comparative efficacy of anti-fraud measures that the Court does not enjoy. I need, therefore, to accord appropriate weight to the considered judgement of HMRC that the direct export arrangements offer the authorities a better opportunity to combat fraud than is possible under WFE. I see force in the point made by Mr White in his evidence, but HMRC has itself identified the relevant risk and nonetheless concluded that direct export is a superior method of control.
70. In these circumstances I am unable to find that HMRC's assessment that the abolition of WFE is likely to reduce substantially the number of fraudulent drawback claims is one that no reasonable customs authority could have reached. However, I do again note that the policy is to be kept under review, and HMRC will no doubt in the period ahead monitor whether the policy has achieved its objective as an anti-fraud measure.

The Second Ground of Challenge

71. The second major ground of challenge to the decision is that HMRC was under a duty to re-consult before taking the decision to abolish WFE, and failed to discharge that duty.
72. The Finance Act imposes no duty to consult interested parties before measures of the kind presently under challenge are taken pursuant to the enabling provisions of that Act. As I mentioned earlier, the measures in question are part of a system of economic management, and it seems to me, therefore, that there is a serious issue whether HMRC was under an implied statutory duty to consult as it did in 2006 on the possible abolition of WFE. However, for present purposes, I shall assume that there was such a duty and I shall consider the scope of the putative duty to re-consult.
73. It was common ground that in regard to the duty to re-consult the correct legal test was formulated by Silber J in R (Smith) v East Kent Hospital NHS Trust [2002] EWHC 2640 at [45]:

"The concept of fairness should determine whether there is a need to re-consult if the decision-maker wishes to accept a fresh proposal but the courts should not be too liberal in the use of its power of judicial review to compel further consultation on any change. In determining whether there should be further re-consultation, a proper balance has to be struck between the strong obligation to consult on the part of the health authority and the need for decisions to be taken that affect the running of the Health Service. This means that there should only be re-consultation if there is a fundamental difference between the proposals consulted on and those which the consulting party subsequently wishes to adopt." (my emphasis)

74. It was also common ground that there was in the present case no fundamental difference between the proposals consulted on and those which the consulting party wished to adopt. One proposal on which HMRC consulted in 2006 was the abolition of WFE. The rationale for the proposal was to reduce fraudulent drawback claims, with expected attendant benefits to the Exchequer and advantages to legitimate wholesale and retail supply of alcohol, in particular, beer. In 2009 WFE was abolished, and for these very reasons.
75. The Claimants, however, put their case as follows:

"….The decision announced on 22 April to abolish WFE Drawback has apparently been based in large part on the recent sizeable increase in WFE drawback claims, and an assumption that this has been caused by increased fraudulent rather than legitimate business activity. Yet interested parties such as the Claimants have been given no opportunity, by further consultation, to present their case as to what has in fact led to the increase in such claims ….Given that the increase in claims post-dates the 2006 consultation exercise, the reasons for that increase ex hypothesi could not have been taken into account in the 2006 consultation." (paragraph 42 of the Claimants' skeleton argument).

76. It seems to me, therefore, that the Claimants are contending that HMRC decided to abolish WFE for a reason that was different from the reasons put forward during consultation in 2006, namely, that following consultation and the introduction of new evidential requirements WFE drawback claims, after a short period, had again substantially increased. Fairness, therefore, required re-consultation on that specific issue.
77. However, in my view, the decision to abolish WFE cannot properly be segmented in the manner postulated by the Claimants' argument. Paragraph 1.1 of the consultation document made clear why HMRC was consulting on the possibility of abolishing WFE. HMRC re-iterated those points at paragraphs 3.1 – 3.2 of the document. No one could have been in any doubt that the reason for the proposal was an apprehended and unexplained increase in WFE drawback claims. Consultees had ample opportunity in the 2006 consultation to explain why such claims had increased in the period from 2001, and why, in the opinion of consultees, the rapid increase in WFE drawback claims during that period did not conceal, contrary to HMRC's provisional assessment, substantial fraud.
78. All that happened after the 2006 consultation was that, after a relatively short period, WFE drawback claims continued to increase rapidly, just as they had increased in the period leading to the 2006 consultation. Furthermore, just as in respect of that previous period, there was no obvious objective economic reason for the increase. The phenomenon – the unexplained increase in WFE drawback claims – was precisely the same; only the period was different. There was no material change in the basic circumstances that could begin to support a case for re-consultation.
79. In my judgment, fairness did not require that HMRC should allow interested parties another opportunity in 2009 to comment upon a matter – the increase in WFE drawback claims – that they had been able to comment upon in the 2006 consultation. Indeed, putting aside the plainly unconvincing point about the depreciation of sterling (see paragraph 58 above), the Claimants are not able to show what new and relevant arguments they would have advanced in a putative 2009 re-consultation that they had not been able to advance in the actual 2006 consultation.
80. Finally, on this second ground of challenge, it is submitted that the Claimants had a legitimate expectation that there would be further consultation. They rely on paragraph 3.7 of the consultation document:

"The Government invites businesses affected by the clarified guidance to consult with HMRC on the precise next steps that will be required. In undertaking these consultations, HMRC will seek, as far as possible, to agree procedures that have the minimum possible impact on businesses".

81. HMRC concluded that there appeared to be a "systematic attack on the duty drawback system", and stated that it:

"now intends to clarify its guidance, contained principally in Notice 207, on the information that is required in support of duty drawback claims, as evidence that UK duty has been paid on the goods in question." (paragraph 3.3).

82. In the context, therefore, it is clear that the intended consultation referred to in paragraph 3.7, quoted above, was a consultation on the procedures that HMRC would require those claiming drawback to follow in order to meet the new evidential requirements. Read in proper context, paragraph 3.7 was not undertaking to re-consult in relation to the lead option to abolish WFE. There is, therefore, no basis for any legitimate expectation that HMRC would re-consult on that option.

The Third Ground of Challenge

83. The Claimants contend that the effect of the abolition of WFE will significantly interfere with free movement of goods between the UK and other Member States. The Claimants accept that the freedom to trade may be restricted so as to combat fraud, but submit that any such restrictions must correspond to that aim and be proportionate. They rely, in particular, in that context on Ampafrance SA v Direteur des Services Fiscaux de Maine-et-Loire [2000] ECR 1-7013 ("Ampafrance"). In that case the Court of Justice invalidated a Community derogation (from Article 17 of the Sixth Directive) that permitted France to deny recovery of VAT input tax in respect of certain forms of business expenditure, a derogation intended to prevent unjustified deduction of input tax on non-business expenditure.
84. The short answer to the Claimants' case under the third ground of challenge is that Article 22 of the Directive specifically regulates reimbursement of excise duty in respect of goods on which duty has been paid and which are exported to another Member State. Article 22 does not require in such circumstances that the Member State of dispatch should reimburse excise duty before the goods have been exported and before the excise duty due in the Member State of destination has been paid or secured.
85. Had the Community legislator thought that, if excise duty could be reimbursed only on proof of export and of duty being paid or secured in the Member State of destination, inter state trade would be significantly and unjustifiably restricted, Article 22 would no doubt have required reimbursement simply on proof of an intention to export and of movement of the relevant goods into a bonded warehouse pending export. The absence of any such requirement in the governing Directive is, in my view, the strongest indication that Member States are entitled under Community law to insist as a necessary condition of reimbursement that the goods are exported and that excise duty is paid or secured in the State of destination. It is not, therefore, surprising to find that, according to the researches of HMRC, Member States uniformly insist on such a condition.
86. The longer answer is that the abolition of WFE does not significantly restrict inter state trade. For the reasons already explained at length earlier in this judgment, HMRC rationally concluded that traders who wished to export beer to other Member States could, if appropriately qualified (as are the Claimants), purchase goods in duty suspension, and in any event they could use the alternative method of direct export.
87. Furthermore, even if inter state trade were affected to some limited extent, HMRC rationally concluded that the abolition of WFE was needed to combat substantial fraud and to remove serious distortion of competition. HMRC reasonably believed that there was no good economic explanation for the rapid increase in WFE drawback claims from 2001/02, and inferred that WFE facilitated fraudulent diversion of beer into the UK market. Measures short of abolition were first tried but failed.
88. In my judgment, Ampafrance is plainly distinguishable on the facts. The right to deduct input tax on business costs is a fundamental element of the VAT system, and differentiation of business expenses from non-business expenditure, which the challenged derogation in that case implicitly rejected as unworkable, is a common feature in developed regimes of, for example, income tax and corporation tax. In the present case reimbursement of excise duty without proof of export and of payment of the duty in the State of destination is not a feature at all of the Directive governing inter state movement of goods. The continuing unexplained and rapid increase in WFE drawback claims, notwithstanding the introduction of other anti-fraud measures, showed that the abolition of WFE was a necessary and proportionate measure to combat substantial fraud and to remove distortion of competition in the relevant UK markets.
89. I, therefore, reject the third ground of challenge.
90. Having now had the opportunity to consider the issues at what was in effect a substantive hearing, I conclude that the second and third grounds of challenge are not reasonably arguable and refuse permission in respect of those grounds. Had I been minded to grant permission, I would, of course, have dismissed the claims in question. I grant permission in respect of the first ground, which I regard was properly arguable, but dismiss the claim based on that ground for the reasons set out earlier in the judgment.