England and Wales High Court (Administrative Court) Decisions

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

		18/12/2009

Mr. Justice Kenneth Parker :

1. This is an application for judicial review brought by the Claimants, Demand & Supply Cash & Carry Limited ("DS") and S&D Retail Ltd ("SD") in respect of certain decisions by the Defendant, The Commissioners of HM Revenue and Customs ("HMRC"), to remove from business premises computers and alcohol, and to detain those goods.

Background

2. DS is a cash and carry wholesaler of alcoholic and non-alcoholic drinks, trading from Oakhill Trading Estate, Manchester. Mr Ramesh Hirani owns DS and is its managing director. For the year ending 31 March 2009 the turnover of DS was about £13.8 million.
3. Mr Hirani's daughter, Dina Hirani, is engaged to marry Mr Sashi Varsani. According to the evidence of Mr Hirani, in June 2006 Mr Varsani set up SD for the purpose of acquiring and supplying alcohol to DS. Mr Varsani and Dina Hirani together own SD. Mr Varsani is the sole director and Dina Hirani is the company secretary. Mr Manji Bhanderi is employed as manager of SD. SD trades from Unit 6, 10G Centre, Barking. From March 2008 it appears that SD began as a cash and carry wholesaler to supply other purchasers of alcohol. In the year ending June 2009 the turnover of SD was about £4.7 million.
4. It is clear from the foregoing that DS and SD are closely interconnected, both from a family and trading perspective.
5. On 2 September 2009 officers of HMRC went to the business premises of DS in Manchester and of SD in London. They removed from each set of premises large stocks of alcoholic drinks. After a time-consuming and detailed analysis, HMRC can find purchase records for only 4000 out of 17000 cases of beer removed from DS. Records also show that, of the beer stock removed from SD, an amount of £223,651 (including VAT) was purchased from Payless Ltd. On 1 December 2009, on the application of HMRC, the High Court (Chancery Division) appointed a provisional liquidator for Payless Ltd. The ground of the application was that Payless Ltd had improperly and knowingly claimed VAT input tax on sham purchases of alcohol from "missing" traders which were in fact from diverted sources.
6. The amount of excise duty properly payable on the stocks of beer removed from the Claimants exceeds £400,000.

The First Ground of Challenge

7. The first ground of challenge is that HMRC acted unlawfully in removing and detaining a number of computers found at the premises of the Claimants. In fact 17 computers were removed from DS and 8 computers were removed from SD. All were returned after being detained for seven days.
8. In this context the applicable legislation is Section 118B of the Customs and Excise Management Act 1979 ("the Act") which provides, so far as is material:

"118 B Duty of revenue traders and others to furnish information and produce documents

(1) Every revenue trader shall—

(a) furnish to the Commissioners, within such time and in such form as they may reasonably require, such information relating to—

(i) any goods or services supplied by or to him in the course or furtherance of a business, or

(ii) any goods in the importation or exportation of which he is concerned in the course or furtherance of a business, [or

(iii) any transaction or activity effected or taking place in the course or furtherance of a business,]

as they may reasonably specify; and

(b) upon demand made by an officer, produce or cause to be produced for inspection by that officer—

(i) at the principal place of business of the revenue trader or at such other place as the officer may reasonably require, and

(ii) at such time as the officer may reasonably require,

any documents relating to the goods or services or to the supply, importation or exportation [or to the transaction or activity].

(5)If it appears to an officer to be necessary to do so, he may, at a reasonable time and for a reasonable period, remove any document produced under subsection (1) or (2) above and shall, on request, provide a receipt for any document so removed."

9. Section 114(2) of the Finance Act 2008 (computer records etc) provides:

"An enactment to which this section applies has effect as if –

(a) any reference in the enactment to a document were a reference to anything in which information of any description is recorded…."

Under Section 114 (9), "produce", in relation to a document, includes furnish, deliver and any other equivalent expression.

10. The Claimants initially contended that "document" in Section 118B of the Act did not include a computer. At the hearing Mr. Brown, who appeared on behalf of the Claimants, prudently did not pursue this contention. Section 114 (2) of the Finance Act 2008 expressly expands the meaning of "document" to include anything in which information of any description is recorded, an expansion that is plainly broad enough to cover the hard drive of a computer. In any event there is a welter of authority, from different contexts, where the expression "document" has been interpreted to include a computer (see, for example, R v The Commissioners of Customs and Excise (ex parte Bottlestop) [1997] EWHC Admin 467 at paragraph 16; and cf CPR 31.4.1).
11. The principal contention of the Claimants was that the power to remove in Section 118B (5) expressly depended upon a "demand" for "production" under Section 118B (1)(b), and that in this case no such "demand" was made.
12. This submission, in my view, has an air of unreality. The reason that Section 118B is drafted in the terms that have been chosen is that in many – perhaps the most typical – cases the relevant "documents" are unlikely to be at hand, readily available to the HMRC officer. In this case, however, such business documents as existed and were removed appeared to be readily available, including, of course, the computers. In any event, I am satisfied on the evidence that both at the premises of DS and of SD the HMRC officers made known the purpose of the visit, the powers under which they were acting, and that they required DS and SD to produce, that is, make available, all relevant business documents falling within the scope of Section 118B (1)(a), including computers that held relevant business information. (See Duxberry, TB/483; Smith TB/266; Hinton TB/486; Varsani TB/70-72).
13. It was plain from the surrounding circumstances that the computers in all probability did hold relevant business information; it is not contended now that they did not contain such information; and the criticism advanced by Mr Brown, that the HMRC officers did not expressly ascertain whether computers located at business premises held relevant information about the business, has an even greater air of unreality.
14. Rather more widely, Mr Brown submitted that the removal of the computers, and their detention, was not proportionate. Mr Puzey, who appeared on behalf of HMRC, accepted that proportionality was engaged, both under European Community law (HMRC's powers regarding excise duty ultimately being derived therefrom) and under ECHR Article 1 Protocol 1 (there being interference in the enjoyment of property rights over the computers). He submitted, and I agree, that a "fair balance" must be struck between the property right and the countervailing public interest: see Lindsay v Customs and Excise Commissioners [2002] I WLR 1766 at paragraph 52; and, generally, Beatson and others: Human Rights: Judicial Protection in the United Kingdom at 3-95.
15. In this context the first issue is whether removal of the computers was justified. Mr Adam Hanrahan is an officer in Specialist Investigations of HMRC and was the officer in charge on the ground at the visit to DS' premises. In his evidence he explained that in order to take a true copy of the information held by a computer it is necessary to image the hard drive of the computer. If a computer is left on site, information can continually be added or removed from it by employees of the business having access to it, whether such employees are acting in good faith or with dishonest motives. In this case one of the HMRC officers at the premises of DS suspected that employees of DS were deleting files from the computers, and informed Mr Hanrahan accordingly. Mr Lack of Pro Vent Computer Security, an experienced forensic IT consultant engaged by HMRC, later confirmed that files were being deleted from the hard drives of the computers on the day of the visit.
16. Furthermore, there is evidence that ordinarily it takes about 2½ hours to image each hard drive. Given the substantial number of hard drives that required to be imaged in this case, HMRC's officers and its expert, Mr Lack, would have been on site for many days. On one estimate something like twelve days of continuous presence would have been necessary. I accept HMRC's submission that that would not have been an efficient or practicable way to proceed, particularly taking into account the fact that the work environment would have been confrontational, and that the continuous presence of HMRC's officers would have made use of the premises for any normal business activities practically impossible.
17. In these circumstances, I conclude that the removal of the computers was reasonably necessary both to preserve the integrity and reliability of the information held on the computers, and also to ensure that the information was recovered in an efficient and effective manner, with a view to reducing the administrative burden on HMRC and minimising the detrimental impact on the Claimants' business. The removal was, therefore, proportionate.
18. The Claimants also allege that the computers were detained longer than was necessary. They say that as soon as the imaging was complete in respect of any computer it should have been returned. The computers were instead returned en bloc after the imaging processes had been completed as a whole. I see some force in this criticism. HMRC point out that the computers were returned in two batches, first on 9 September and then on 11 September 2009. Furthermore, the expert examination and retrieval of information was taking place at Northampton, and it was logistically cumbersome to return the computers individually. I do not think that these points provide a complete answer to the criticism. However, all the computers were returned after seven days, and the period of detention does not seem to me unreasonable. Nonetheless, for further cases I believe that there could well be justification for some form of protocol that would allow individual computers to be returned as soon as they were ready for return, provided that this could be achieved without undue administrative burden and expense. Nowadays computers are an indispensable business tool, and as a matter of good administrative practice they should not be removed from enterprises longer than is strictly necessary.

The Second Ground of Challenge

19. The second ground is that HMRC removed documents that were not business documents. It is correct that Mr Hanrahan removed some papers belonging to Mr Hirani that were personal papers such as bank statements. However, HMRC was confronted with a large amount of documentation. As already explained, Mr Hirani owned DS and was a director of DS. Mr Hanrahan had good reason to believe that papers of Mr Hirani kept on DS' business premises could well contain relevant business information. Scrutiny of the papers in question was given priority; and, once it was ascertained that they were not relevant business documents, they were returned on 9 October 2009. Given the circumstances, this appears to me an efficient, sensible and proportionate procedure for HMRC to assure itself that the documents in question were genuinely personal ones not falling within the scope of Section 118B of the Act.

The Third Ground of Challenge

20. In reality, the third ground constitutes the core of the claim, namely, that HMRC unlawfully removed large quantities of alcohol from DS and SD, and then has detained the goods for an unreasonable and unlawful period.
21. By way of background to this alleged ground, it is worth recalling that "diversion" fraud is a major and almost intractable fiscal and economic problem. Each year large volumes of alcohol, upon which duty is payable and not paid, is illegally "diverted" to domestic consumption, with a resulting huge loss to the public revenues and significant distortion of competition in the UK wholesale and retail markets for the supply of alcohol, particularly beer. The rewards to rogue traders are high, because excise duty comprises a very large element in the purchase price of alcohol and those who manage to acquire stock free of duty can both purchase at prices well below the lawful market acquisition price and re-sell at prices significantly below the lawful market resale price, reaping impressive profits. The costs of entry into this illicit trade would appear low, requiring not much more than rented warehousing facilities; and detection is difficult because stock may typically pass through many intermediaries, and the task of establishing the ultimate (unlawful) source of the alcohol may be far from straightforward. On the other hand, it would not appear a simple matter to achieve success in the lawful wholesaling of alcohol: the products sold are homogeneous (one can of Carling Black Label is the same as another); the wholesale market is mature and competitive; and a price advantage usually needed to win a share of the trade is not particularly easy to secure.
22. In these circumstances it would not seem surprising if HMRC kept under careful review those traders who enter this particular market and then achieve, as the Claimants have achieved, an impressive turnover in alcohol within a relatively short period. The background issues are well known and it would also come as no surprise that HMRC would expect traders, upon whom suspicion might fall, to have appropriate systems and to keep proper records for the purpose of reassuring HMRC that their trading activities were lawful.
23. It is common ground that HMRC has power to detain goods: see Section 139 of the Customs and Excise Management Act 1979, which was considered in detail in Gora v Commissioners of Customs and Excise [2003] EWCA Civ 525. The Claimants contend that this power is exercisable only if HMRC has reason to believe that the goods in question are subject to excise duty, that excise duty has not been paid on the goods and that they are in consequence liable to seizure.
24. In my view, that formulation places the legal test too high. HMRC must have an adequate reason for detention, namely, that they wish to determine whether the goods are subject to excise duty and whether duty has in fact been paid upon them: see Gora paragraphs 51 and 52. Furthermore, given the need to act proportionately (see paragraph 14 above), it is well arguable, especially where the detention is likely to be more than transitory (such as a spot check of travellers at the border), that HMRC must have some cause for suspecting that at least there is a real possibility that the goods might be subject to excise duty and that duty might not have been paid on them.
25. In this case a company known as Cube Cash & Carry Ltd ("Cube") had ostensibly supplied a very large quantity of excise goods to another alcohol wholesaler. HMRC detained the goods in question and obtained the books and records of Cube that were in the process of being destroyed when HMRC investigated. HMRC ascertained that large volumes of the detained goods originated from "missing" traders, strongly suggesting that excise duty had not been paid on the relevant goods and that Cube knew, or ought to have known, that it was trading in goods upon which no excise duty had been paid. HMRC raised an assessment on Cube and it is now in liquidation.
26. The next step was for HMRC to trace traders who had purchased alcohol from Cube. DS was identified as such a purchaser. Mr Brown referred to the fact that purchases from Cube dated from 18 months before the visit on 2 September 2009. In my view, that had little relevance: once DS was identified as being a purchaser from Cube at a time when Cube was thought to be a tainted source, investigation of DS was to be expected, both to confirm that DS had indeed purchased from Cube and to explore the other sources of DS' alcohol in stock. On entering DS' premises on 2 September 2009, HMRC found 500 pallets of alcohol on site, representing about 40,000 cases.
27. Mr. Hanrahan asked Mr Varsani, who was present at DS' premises, whether DS had on site any manual or computerised system linked to the goods physically located in the warehouse, that is, a proper system for recording the entry of stock and stock movement. There was no such system: Mr Varsani could not identify the source of the relevant alcohol. Mr Hanrahan said in his witness statement for these proceedings:

"The disorganised condition of the records prevented an accurate judgement to be made at the premises and necessitated the decision to detain and remove the goods to the QW for safe storage until HMRC could analyse the supplies and make a judgement on the seizure or return of the goods."

20,553 full cases and 461 loose cans/bottles were detained from DS' premises.

28. Against the background that I have explained, the detention appears to me to have been fully justified. Alcohol from SD's premises was also detained. Taking account of the close connections between the two companies (see paragraph 4 above) there was also justification for detaining goods stocked at SD's site. 11,124 cases and 2,135 loose cans/bottles were detained from SD's premises. In the event it has come to light that SD was a significant purchaser from another substantial tainted source, Payless Ltd (see paragraph 5 above).
29. It appears that a small quantity of spirits, upon which there were duty paid stamps, were also removed. HMRC removed the spirits in order to verify that the stamps were genuine and to seek to identify whether the goods were indeed duty paid.
30. The Claimants also criticise the period for which the goods have been detained. However, given the absence of a proper stock system, HMRC has been confronted with a massive task of record reconstruction and tracking and tracing the source of the goods in question. HMRC has had to analyse such purchase invoices as it has obtained for the period 3 November 2008 to 30 April 2009. Those invoices have had to be laboriously scheduled line by line to reconstruct a proper stock system.
31. Once the records are analysed it is then necessary to trace suppliers back to source. To date 222 track and trace requests have been made of manufacturers, but only 18 replies have been received. These replies are themselves inconclusive and require further investigation.
32. I am satisfied on the evidence that HMRC has acted with reasonable dispatch in seeking to ascertain the true source of goods detained from DS' and SD's premises, given both the inadequacies in the stock system found there, the wholesale lack of purchase invoices and the magnitude of the task of laboriously re-constructing records and tracking and tracing purchases. HMRC has so far seized 4,000 cases of alcohol. At the hearing Mr Puzey informed the Court that HMRC intended to take a decision regarding all other detained stocks of alcohol by the end of January 2010. This has been far from a straightforward routine case, and the departure from the shorter timescales that are expected in such cases is, in my view, not at all surprising or unlawful.
33. For these reasons, I find that none of the grounds of challenge, upon examination, has merit and I dismiss this claim for judicial review.