QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| THE QUEEN
On the application of
HT & Co. (DRINKS) LIMITED
MALCOLM COWEN (DRINKS) LIMITED
|- and -
|THE COMMISSIONERS FOR HM REVENUE & CUSTOMS
James Eadie QC, Sarah Harman (instructed by Solicitor's Office, HMRC) for the Defendant
Hearing date: 6 March 2015
Crown Copyright ©
The Honourable Mr Justice Cobb:
"… permits wholesale trading in alcoholic drinks and other dutiable goods which are held in, or moved between, excise warehouses without giving rise to an "excise duty point" and thus attracting liability for excise duty. Goods so traded are generally described as "duty-suspended goods". The regime is governed by both EU and domestic regulations. The Warehousekeepers and Owners of Warehoused Goods Regulations 1999 ("the Regulations" – also known as "WOWGR") provide for persons holding or buying duty-suspended goods to be approved and registered by Her Majesty's Revenue & Customs ("HMRC") as "registered owners". The regime is highly prescriptive as regards the procedures and paperwork to be employed, but there is a recognised problem of dishonest traders seeking to manipulate the system in order to evade duty, typically by so-called "duplicate loads" being moved under cover of paperwork generated for legitimate movements. Registered owners are expected to use all due diligence to prevent their legitimate trade being exploited to facilitate fraudulent transactions."
i) Revocation of HT's authorisation as a registered owner of duty-suspended goods (this was to have immediate effect);
ii) Revised approval of HT's premises at Admiral House, London Rd, West Thurrock from 15 December 2014 to 16 March 2015 with termination operable from 16 March 2015; in the meantime a condition banning the exportation of goods from this warehouse to the EU;
iii) Revocation of HT as an authorised warehousekeeper with effect from 16 March 2015;
iv) Revocation of MC's authorisation as a registered owner of duty-suspended goods with immediate effect.
"Failure to comply with a condition of approval could result in your registration being revoked. You may also incur a financial penalty".
"Our enquiries and review of your records have shown that the due diligence you carry out on your underbond customers and on the transactions you carry out with your customers is inadequate….
We also have serious concerns about the way in which vast sums of cash sterling have entered your business without meaningful Anti-Money Laundering (AML) procedures being followed…
During the course of our investigations we have found that your lack of meaningful due diligence and lack of money laundering controls has led to the following …"
There then follows a list of alleged consequences of these defaults including the supply of goods to customers with no commercial viability, supplying duty suspended alcohol into supply chains that have ended with missing traders, leaving substantial VAT debts in the EU, and suspected money laundering offences committed by the Claimants' customers.
i) There was no challenge by the Claimants at the time of the authorisations;
ii) Due diligence conditions similar to those imposed on the Claimants in March 2014 are now (and have been since November 2014) common to all excise authorisations.
i) Ceasing to accept cash payments for their duty-suspended sales to third parties; and
ii) Ceasing to offer credit facilities to new duty-suspended third-party customers.
"The Commissioners may at any time for reasonable cause revoke or vary the terms of their approval or registration of any person under section 100G(5) of the Customs and Excise Management Act 1979. Unless you now fully comply with all the conditions notified to you on 18th March, including but not limited to addressing the failures notified at 1-6 above, your approval will be revoked with immediate effect and without any further notice to you."
"[T]he question of 'commercial viability' was explored and [the Claimants] and TDL were left in no doubt as to the practical meaning of the requirement in the context of trading in duty-suspended goods".
i) The representative from TDL told HMRC that he considered that "the conditions imposed are not feasible or workable", and that HMRC was 'changing the goalposts';
ii) The Claimants' solicitor told HMRC that "amendment was needed" to the conditions, indicating that HT had not accepted part of the conditions; he is later reported to have said that the Claimants considered "the conditions to be totally unreasonable and felt that they would not stand up in a Tribunal";
iii) The Claimants had asked for removals and changes to the conditions; they further asked for "perceived non-workable areas" to be referred and escalated to HMRC decision-makers;
iv) That the Claimants were still "in the process of bringing due diligence up to date for existing customers";
v) The Money Laundering Reporting Officer said that "the conditions laid had not ever been agreed, HT/MC considered the conditions impractical…";
vi) That the Claimants would set out their areas of concern and their proposed variations to the conditions in writing within two weeks;
vii) A senior HMRC representative informed HT/MC at the meeting that "if it was found that the conditions were not being met HMRC can revoke the approvals".
i) Accused HMRC of a "misguided belief" that the Claimants' customers would share sensitive information with them as part of the due diligence exercise;
ii) Alleged that HMRC was setting "a highly unrealistic target" in relation to due diligence, asserting that the expectations are "commercially unviable";
iii) Maintained that "the level of information HMRC are seeking to elicit, through the medium of our clients, significantly falls outside the scope of what our clients can realistically obtain".
"… as to the legitimacy of the market that they supply, in order to reassure HMRC that their businesses do not pose an unacceptable risk to the Revenue … HMRC need to see information that [the Claimants] have considered in order to assess for themselves the impact of [the Claimants'] decisions on reducing, or exacerbating, the risk to the Revenue that is inherent in dealing in duty-suspended goods" (reference: letter 26 January 2015).
i) It is first argued that while the conditions imposed were unduly onerous, the alleged breaches of the conditions are merely 'purported' and 'perceived' 'administrative/technical' shortcomings in nature (/ Skeleton Argument); it is alleged therefore that revocation of authority is 'grotesquely disproportionate' ([5a] of Detailed Grounds). They contend that HMRC has failed to demonstrate why no less draconian sanction could have been imposed. The Claimants point to the HMRC manual which provides for the imposition of civil penalties; they say that there is a reasonably inference that civil penalties should be considered (and indeed imposed) before taking the step of revocation, relying specifically on the following passage:"Where continuing issue of civil penalties does not result in improved trader compliance, officers will need to consider alternative action. A trader's failure to improve his compliance record demonstrates a lack of concern for the regulations breached and the directions issued by HMRC. In such circumstances, officers must seriously consider whether the trader warrants continued authorisation/approval."
ii) The Claimants assert that they have not been given a proper opportunity to answer the alleged inadequacies in their due diligence procedures, and that the ultimate sanction of revocation was procedurally unfair; they complain of a lack of consultation, and an alleged failure of the HMRC to provide a "show cause" letter in accordance with the suggestion for good practice proposed by the Court of Appeal in CC&C, where Underhill LJ said:"The risk of error is obviously increased if the trader has not been given an opportunity to draw to HMRC's attention, before the decision is taken, factual or other matters which they may have overlooked or mis-appreciated in their assessment of the grounds for revocation. I do not see why it should not be normal practice for a trader whose registration HMRC is contemplating revoking to be given prior notice of the intended decision, and the grounds for it, in the form of a "show cause" or "minded to" letter, with a limited time for response, before a final decision is taken. (Or the decision could be notified, but on the basis that it would not take effect for a limited period during which representations could be made.)"  (emphasis added).In this regard they further rely on the decision of the Supreme Court in Bank Mellat v HM Treasury (No.2)  UKSC 38 / 39  AC 700.
iii) The imposition of conditions as onerous as those imposed here are in breach of the obligation in EU law to permit free movement of goods; it is said that HMRC has exceeded the powers of a Member State to control duty-suspended storage and movement of dutiable goods; there is an "issue" (it is put no higher than this in the Detailed Grounds) that the system of registered owners is ultra vires the provisions of Council Directive 2008/118/EC concerning the General Arrangements for Excise Duty ("the 2008 Directive"), which came into force on 1 April 2010 through the Excise Goods (Holding, Movement and Duty Point) Regulations 2010 (the "2010 Regulations"). In essence the Claimants maintain that HMRC has no power to impose conditions which affect the Claimants' business with export customers to non-EU countries or EU Member States.
iv) It is asserted that the action breaches the Claimants' ECHR right to freedom from interference with property – and they rely on Rosenzweig v Poland (2006) 43 EHRR 43 maintaining that the interference here is not justified in pursuit of a legitimate public interest.
"… the management of the excise system is a matter for the administrative discretion of HMRC. The decision whether a registered owner remains a fit and proper person to trade in duty-suspended goods is a good example of the kind of decision which the HMRC are peculiarly well-fitted to judge, since it requires what is necessarily to some extent a subjective – albeit evidence-based – assessment of such matters as the attitude of the trader and its principal employees to due diligence issues and their sensitivity to the risk of becoming involved, albeit unintentionally, in unlawful activities".
"… the body entrusted by Parliament with the role of administering the tax system, who have made the relevant decision …. They have experience and expertise in making evaluative judgments of the kind in question here."
This was further recently alluded to by Sir Robin Jacob (giving the judgment of the Court) in R (Ingenious Media Holdings PLC & An'or) v HMRC  EWCA Civ 173 at :
"The Court is not a tax-gatherer. It simply is not in a position to evaluate the likely effect of a disclosure on an HMRC function in the same way as an official concerned with the day to day operation of the system".
i) There is a bespoke statutory scheme available to traders in the position of these Claimants, where it is alleged that HMRC has exceeded its powers, or exercised them unreasonably, in the FTT (see section 16 Finance Act 1994); the FTT has the power to consider all of the complaints made by the Claimants raised within this prospective application for judicial review. It would be wrong for the High Court to permit a challenge to a decision of the kind covered by the statutory scheme (see CC&C [39/40]). Moreover, statute does not endow the FTT with the power to grant interim relief, and this Court should not step in to fill a perceived jurisdictional gap; as Underhill LJ in CC&C reflected at :"Parliament could have provided for the First-tier Tribunal to have power to make suspensory orders pending the outcome of an appeal, but it did not do so. I do not think that it is open to the Court to provide remedies or procedures for which the statute does not provide – particularly so when, as I have pointed out above, care was obviously taken to specify precisely what the Tribunal could and could not do."
ii) It was a proportionate response of the HMRC to revoke the licences given the evidence of sustained non-compliance, the continuing resistance to complying over a period of 8 months, and the Claimants' assertions that they were unable to comply. Specifically:a) the Claimants' trading practice in the past had given rise to very significant concerns, including extensive due diligence failures;b) the Claimants new due diligence procedures implemented after the conditions were imposed in March 2014 were in many respects superficial – little more, it was said, than a box-ticking exercise;c) conditions had been lawfully imposed on 18 March 2014. The Claimants had not challenged the lawfulness of the conditions at the time, and indeed had not done so until many months after the event; the challenge to the conditions was unsustainable as (since November 2014) these are now broadly standard within the trade;d) there had been continuing and serious failures to implement improvements, specifically in following and evidencing appropriate due diligence procedures;e) the steps taken to assist and reinforce improvements in the Claimants' practice of due diligence had proved to be ineffective.
iii) The process has been procedurally fair; the Claimants have had more than enough opportunity to address compliance with the conditions; there has been a prolonged and detailed engagement with the Claimants over a significant period, accompanied by a ratcheting up of enforcement measures;
iv) The excise regime in operation domestically is entirely in accordance with the 2008 Directive.
"For the purpose of administering, collecting or protecting the revenues derived from duties of excise, the Commissioners may by regulations under this section (in this Act referred to as "registered excise dealers and shippers regulations") —
(a) confer or impose such powers, duties, privileges and liabilities as may be prescribed in the regulations upon any person who is or has been a registered excise dealer and shipper; and
(b) impose on persons other than registered excise dealers and shippers, or in respect of any goods of a class or description specified in the regulations, such requirements or restrictions as may by or under the regulations be prescribed with respect to registered excise dealers and shippers or any activities carried on by them". (emphasis added).
"The Commissioners may approve and register a person under this section for such periods and subject to such conditions or restrictions as they may think fit or as they may by or under the regulations prescribe" (emphasis added).
"The Commissioners may at any time for reasonable cause revoke or vary the terms of their approval or registration of any person under this section." (emphasis added).
"In relation to any decision as to an ancillary matter, or any decision on the review of such a decision, the powers of an appeal tribunal on an appeal under this section shall be confined to a power, where the tribunal are satisfied that the Commissioners or other person making that decision could not reasonably have arrived at it, to do one or more of the following, that is to say—
(a) to direct that the decision, so far as it remains in force, is to cease to have effect from such time as the tribunal may direct;
(b) to require the Commissioners to conduct, in accordance with the directions of the tribunal, a review or further review as appropriate of the original decision; and
(c) in the case of a decision which has already been acted on or taken effect and cannot be remedied by a review or further review as appropriate, to declare the decision to have been unreasonable and to give directions to the Commissioners as to the steps to be taken for securing that repetitions of the unreasonableness do not occur when comparable circumstances arise in future." (emphasis added).
i) The application before the court was a free-standing application for an injunction under section 37 Senior Courts Act 1981, and not for an interlocutory order within judicial review proceedings; and
ii) There was no suggestion of procedural unfairness.
He goes on to argue that the key principles expounded in CC&C are therefore of limited relevance to this case. He specifically dissociates this claim from those in which an applicant for relief would need to satisfy the 'exceptional' threshold of 'fundamental unlawfulness' (or similar) so as to be entitled to the intervention of the High Court. He further argues (with more conviction, I detect) that if he fails in that primary submission, the facts of this case do meet the 'exceptional' threshold required.
"[W]here the challenge to the decision is not simply that it is unreasonable but that it is unlawful on some other ground, then the case falls outside the statutory regime and there is nothing objectionable in the Court entertaining a claim for judicial review or, where appropriate, granting interim relief in connection with that claim"  (emphasis added).
For my part, I can see no proper basis for concluding that a different test applies where the application is brought within prospective judicial review proceedings. Indeed, were a lower bar to be set for cases of prospective judicial review, this could provoke a proliferation of unmeritorious claims in the Administrative Court in cases which should be, or indeed are, before the FTT, simply as a vehicle for obtaining interim relief. Moreover, dealing with Mr. Pickup's second alleged distinguishing feature ([45(ii)] above), Underhill LJ specifically contemplated that procedural unfairness could found a basis for challenge outside the statutory scheme (see below ), so the fact that it was not actually argued in CC&C is of no consequence.
"In short, therefore, I believe that the Court may entertain a claim for judicial review of a decision to revoke the registration of a registered excise dealer and shipper, and may make an order for "interim re-registration" pending determination of that claim (subject, no doubt, to such conditions as it thinks fit), in cases where it is arguable that the decision was not simply unreasonable but was unlawful on one of the more fundamental bases identified above. Such cases will, of their nature, be exceptional." (emphasis added).
"The view that I have taken of the law means that HMRC's power of revocation is indeed capable of operating harshly, essentially for the reasons advanced by Mr Jones: if they make an unreasonable decision, the trader affected by their mistake will almost certainly suffer serious uncompensatable loss, which may sometimes be fatal to his business, before it can be corrected through the review or appeal mechanisms. It is all the more important, therefore, that they take all possible care to ensure that any such decision is well-founded." (emphasis added).
i) the wider public interest in the trade in dutiable goods being properly regulated, and being carried out only by persons who HMRC can trust, and in a manner which protects the interests of the Treasury and prevents fraud;
ii) the Claimants' history of non-compliance with conditions;
iii) the fact that the FTT is statutorily mandated to consider the Claimant's appeal, and is indeed seised of the Claimants' case.
Weighing in the balance would also have been the "obvious awkwardness" (see  CC&C) of the Tribunal or the Court requiring HMRC to continue, for an indefinite period pending the outcome of the application for judicial review, to confer a privilege on traders who they have ceased to believe are fit and proper persons. Weighing all of these matters together, I would have concluded that the balance of convenience comes down against the Claimants.