England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		7 March 2007

MR JUSTICE MANN:

Introduction

1. This is an appeal from a decision of the VAT and Duties Tribunal, Chairman, Mr Michael Johnston, dated 27 July 2006, in which the Tribunal upheld an assessment made by HM Custom's and Excise on 1 July 2004 in respect of unpaid excise duty totalling £67,479.85. The person assessed was the appellant in these proceedings, Thomas Corneill & Co Limited ("Thomas Corneill"). The assessment was based on a calculation of the amount of excise duty said to be payable because Thomas Corneill was said to have used diesel fuel intended for non-vehicular use in its lorries.

Factual background

2. Thomas Corneill is a company which runs a number of lorries. On 27 November 2003 officers of Customs and Excise tested the fuel in one of its lorry's tanks. It was found to contain traces of diesel fuel on which a rebate had been obtained under the legislative provisions to which I will come ("red diesel"), a level of contamination of 6 per cent. On the same day other officers attended at Thomas Corneill's premises and tested the fuel tanks in those premises and the tanks of other road vehicles found there. None of those tests found traces of red diesel. All the fuel thus found was fuel on which duty had apparently been paid without any rebate and which was appropriate for the use of vehicles ("white diesel").
3. The lorry whose fuel was found to be contaminated was impounded but was restored on payment of a penalty and other charges. Following on that finding Customs took various records of fuel purchases from Thomas Corneill. Some of those records showed purchases of white diesel from a supplier regarded as legitimate. However, HM Customs & Excise identified supplies of what was said to be white diesel by ostensible suppliers which it did not consider to be genuine. Mr Gilmore, a Customs & Excise officer, carried out a calculation of fuel which it was considered would have been red diesel and which was used in the tanks of lorries, and raised an assessment in the sum referred to above as being an amount of rebate of excise duty due in respect of the use of impermissible fuel.
4. The assessment itself did not specify the provisions under which it was made. However, a letter of the same date, which is assumed to have been served with the assessment, sets out details of how the calculation underlying the assessment was carried out and states it to have been made under Section 13 of the Hydrocarbon, Oil and Duties Act 1979 (HODA).
5. Since part of the argument on this appeal turns on the acceptability of that methodology it is necessary for me to set it out shortly. Mr Gilmore's reasoning and conclusions were as follows.

(1) He identified certain alleged suppliers who did not seem to exist or did not appear to be legitimate fuel suppliers.

(2) He got details of the vehicles operated by the company from 1 January 2002 to 27 November 2003.

(3) He ascertained the mileage driven by each of those lorries, but in respect of two of them he had to exercise what he described as "best judgment" in calculating the mileage because complete records were not available. For the others he relied on material such as tachographs.

(4) By applying a miles per gallon figure he assessed the fuel that must have been used by the lorries driving the miles already ascertained during the period in question.

(5) He compared the fuel which he calculated as having been used with the legitimate fuel. On his calculations the total fuel used was 169,071.71 litres. The legitimate fuel purchased was 29,781.12 litres. The difference was, therefore, 139,290.59 litres.

(6) He then applied a fuel rebate figure to that difference. The rebate applicable over the relevant period had changed twice so he apportioned the fuel across that period on a time basis. That gave a total rebate figure of £67,479.85. That was the amount assessed.

(7) The schedules to his calculations showed that total fuel purportedly supplied under the suspect invoices was 131,000 litres.

(8) It was implicit in Mr Gilmore's calculation that the shortfall of the fuel, the 139,000 litre figure, was all red diesel.

(9) He expressed his assessment as having been carried out pursuant to Section 13 of HODA.

6. Thomas Corneill asked for a review of the assessment. The review was carried out by Mr David Harris. He upheld the assessment on 23 September 2004. It is from that review that Thomas Corneill appealed to the Tribunal.

The Legislation

7. In order to understand the appeal to the Tribunal and the appeal to me it is necessary to have in mind the relevant legislative provisions. The two acts which figure in the appeals are HODA and the Finance Act 1994 ("The 1994 Act").
8. HODA imposes a tax on hydrocarbon oil. Section 6 provides:

(6) Excise duty on hydrocarbon oil:

(1) subject to subsections (2)…and (3) below there shall be charged on hydrocarbon oil-

(a) imported into the United Kingdom; or

(b) produced in the United Kingdom and delivered for home use from a refinery or from other premises used for the production of hydrocarbon oil, or from any bonded storage for hydrocarbon oil not being hydrocarbon oil chargeable with duty under paragraph (a) above

a duty of excise at the rate specified in subsection 1A below."

I do not need to set out the rates in question. "Home use" in that section means (it is common ground) use in the UK market.

9. Having imposed a duty, section 11 of that Act allows a rebate. It does so in these terms:

(11) Rebate on heavy oil

Subject to subsections 12, 13, 13AA and 13AB below, where heavy oil charged with the excise duty on hydrocarbon oil is delivered for home use, there shall be allowed on the oil at the time of delivery a rebate of duty at a rate…"

Then various rates are set out.

10. Thus the regime so far is to impose a duty on the fuel which is to be used in this country, but to allow an apparently general rebate of so much per litre. It is a very significant amount.
11. Section 12 then operates to disallow the rebate for fuel used or to be used in road vehicles, thus re-imposing the full amount of duty. Section 12, so far as material, reads as follows:

"Rebate not allowed on fuel for road vehicles

(1) If, on the delivery of heavy oil for home use, it is intended to use the oil as fuel for a road vehicle, a declaration shall be made to that effect in the entry for home use, and thereupon no rebate under Section 11 above shall be allowed in respect of that oil.

(2) No heavy oil on whose delivery for home use rebate has been allowed whether under Section 11 above or 13AA below, shall-

(a) be used as fuel for a road vehicle; or

(b) be taken into a road vehicle as fuel

unless an amount equal to the amount for the time being allowable in respect of rebate on like oil has been paid to the Commissioners in accordance with regulations made under Section 24(1) below for the purposes of this section."

I do not need to read subsection (3).

12. It is not in dispute in this case that the fuel in issue in the present case is heavy oil within the meaning of that section. It is subsection 2 which figures in this case.
13. Section 13 (1A) deals with the use of rebated oil in vehicles. It reads as follows:

"13 (1A) Where oil is used or is taken into a road vehicle in contravention of Section 12(2) above the commissioners may-

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

(b) notify him or his representative accordingly."

14. This is the section under which Corneill was assessed in the present case. It obviously applies to rebated fuel (red diesel in the present case). If that fuel is used in vehicles then the user is liable to pay the amount of the rebate which has hitherto been obtained on the fuel so far as the rebate is applicable to the fuel.
15. Two other assessment provisions are relevant because they figure in the decision below and in the argument before me. The first is Section 12 of the 1994 Act. It reads as follows:

"Assessments to excise duty

(1) Subject to subsection (4) below, where it appears to the Commissioners—

 (a) that any person is a person from whom any amount has

become due in respect of any duty of excise; and

 (b) that there has been a default falling within subsection (2) below,

the Commissioners may assess the amount of duty due from that person to the best of their judgement and notify that amount to that person or his representative."

16. Subsection (2) then defines the defaults which are referred to in subsection 12. For present purposes it is necessary to note that the section only operates where there has been a default as defined.
17. The second provision relevant to these proceedings is Section 12A:

"12A Other assessment relating to excise duty matters

(1) This subsection applies where any relevant excise relief other than an excepted relief-

(a) has been given but ought not to have been given; or

(b) would not have been given had the facts been known or been as they later turn out to be.

(2) Where subsection (1) applies the Commissioners may assess the amount of the relief given as being excise duty from the liable person and notify him or his representative accordingly.

(3) Where an amount has been assessed as due from any person under…

(c) Section 10, 13…of the Hydrocarbon, Oil Duties Act 1979…and notice has been given accordingly that amount shall, subject to any appeal under Section 16 below, be deemed to be an amount of excise duty due from that person and may be recovered accordingly unless or except to the extent that the assessment has subsequently been withdrawn or reduced."

The decision of the Tribunal

18. The Tribunal decided in favour of the Commissioners. It held that HODA Section 13, was not applicable to this case. Thomas Corneill had argued that that section could only be invoked in relation to particular vehicles and it could not be used for the sort of global or general assessment which had occurred in this case. The Tribunal acceded to that argument. Paragraphs 30 to 32 of the Tribunal's decision states:

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

31. We also note that the computation of the assessment is to be by reference to the rebate at the rate in force '…at the time of the contravention'. If the construction urged by Mr Poole is correct, it is hard to see the sense in constructing a general assessment slavishly by reference to that rate of rebate in his calculation, being those applicable during the periods in which, as he found the Appellant's vehicles had been operated.

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

19. It supported its reasoning by concluding that Section 12A of the 1994 Act was capable of operating. It seems to be implicit in the decision of the Tribunal that the existence of that Section 12A power, which the Tribunal regarded as more general and less particularised than Section 13 of HODA, was a reason for holding the Section 13 of HODA operated in a more limited and in more particular circumstances with a focus on particular use in a particular vehicle. It recorded that the representative of Thomas Corneill did not dispute that duty would theoretically be assessable under Section 12A so long as the evidence brought it out. The Tribunal came to the conclusion that a power to make an assessment existed under Section 12A. It found in paragraph 37 of the decision that:

"The assessment does not state that it has been made under [Section 13 of HODA]"

And it accepted a recorded submission of HMRC that the assessment could stand as it is made under Section 12A(2).

20. Having thus decided in terms of the statutory basis of the assessment it went on to consider whether or not Customs was right on the facts and to consider whether all the fuel supplies said by HMRC to have been red diesel were in fact red diesel. It came to the conclusion that they were. It found facts which I can summarise as follows.

(1) The disputed fuel came from five ostensible sources, concerns identified as GSG, MPD Services, Star Fuel, Geo Broughton and CPL Petroleum. It found and accepted that invoices from GSG showed the VAT registration number of a clothing store with a different name, and invoices ostensibly from MPD Services had the VAT number of a company in Hull dealing in rubber, again with a different name. Neither of those two other companies was concerned in the business of supplying fuel.

(2) The Star Fuel invoices gave a VAT registration number of a company known as Star Tractor and Motor Oil Co Limited. The Tribunal found that that company did not issue the invoices held by the appellant and it had never supplied the appellant with fuel.

(3) The Geo Broughton company denied that it had issued the invoices in question and said it did not make supplies to Corneill. That was not challenged.

(4) CPL Petroleum was a known supplier of red diesel.

(5) On the basis of that material the Tribunal found that on the balance of probabilities the invoices were falsified so far as they purported to relate to legitimate white diesel supplies. The Tribunal found it to be probable that the supplies of fuel to which they purported to relate were "illegitimate".

(6) It then went on to deal with Thomas Corneill's case that it acted in good faith in dealing with the individuals involved in those apparent companies. Mr Corneill, the managing director of Thomas Corneill, gave evidence as to his method of business, including the fact that he turned over trucks, in the sense of buying and selling them, very regularly and rang round suppliers to get the best price for fuel. He was unable to explain how it was that red diesel was found in one lorry's tank, and such speculative explanations as he did advance were not accepted by the Tribunal.

(7) The Tribunal then went on to summarise the history of the matter before it, including two adjournments so that Thomas Corneill could assemble information. On the final hearing important information was still not available. When the matter finally came on for hearing on 27 October 2005 the information provided raised more questions than it answered. Mr Corneill was unable to give satisfactory contact details for any of his suppliers. Such evidence of payment as there was showed inexplicable methods for payments (in some cases invoices were paid by two cheques plus cash) and two cheques for the Star Fuel consignments were made out to pay to other identifiable companies who were known to be distributors of mainly red diesel. There were other unsatisfactory and unconventional payment aspects.

(8) The decision records Mr Corneill's evidence that he did not know that any supplies were of illegitimate red diesel. He simply paid his suppliers as they had requested to be paid. He pointed out that it would make no sense for him to run the risk of contaminating fuel tanks in his vehicles because they were turned over rapidly, presumably inviting the Tribunal to find that he would otherwise risk discovery of red diesel in a vehicle once sold.

(9) Paragraph 79 of the decision recorded Mr Gilmore's acceptance that the amounts of fuel shown by the invoices to have been purchases from the suspect suppliers was consistent with the mileage covered by Corneill's vehicles according to their tachograph and other documentation. He suggested that the lack of positive tests for red diesel in the tanks and lorries, apart from the first-tested lorry, was explicable by the fact that the two last purchases of fuel between 10 April 2003 and 27 November 2003 were of legitimate fuel which was not disputed by HMRC.

21. Based on all the evidence the Tribunal concluded that on the balance of probabilities it was demonstrated that the fuel supplied other than the legitimate fuel was indeed of red diesel. It found it significant that Star Fuel, whoever that was, was paid in such an unconventional manner and that the actual seller was unknown. The fact that cheques were written in favour of suppliers of red diesel was also significant. It pointed out that the manner in which Corneill obtained its fuel gave great scope to excise duty fraud. If one was prepared to seek diesel from the cheapest source and not ask too many questions, as was the approach of Mr Corneill, it was only to be expected that the fuel supplied would be red diesel.
22. CPL Petroleum was a known supplier of red diesel, and other suppliers covered their tracks by giving false registration numbers. Part of the evidence of Mr Corneill was that recent diaries, which he said contained contact details of suppliers, had been disposed of, which was why he could not get contact details. The Tribunal found that "particularly unsatisfactory". It found it inherently unlikely that the appellant's 2002 diary would already have been destroyed. It considered that had contact details been provided the evidence would have gone to confirm the Tribunal's firm impression that all supplies in issues were indeed of red diesel. In the circumstances it found the issue in favour of HMRC.

The issues on this appeal

23. The issues on this appeal have been simplified by the fact that HMRC have withdrawn reliance on Section 12A of the 1994 Act. It is now accepted by HMRC that that section cannot apply. That means that the issues on this appeal are twofold. Could the assessment have properly been made under Section 13 of HODA? If it was not, or if it could not, then the appellant succeeds. If it could properly have been made then the second question is whether the evidence before the Tribunal justified a finding that all the diesel in question was indeed red diesel.
24. On the first point, Mr Richard Barlow, for Thomas Corneill, accepted and adopted the general thrust of the determination of the Tribunal on the point, although he put the case slightly differently and adopted a different line of reasoning for getting there.
25. On the second point he said that the evidence was not sufficient to justify a finding against his client.
26. Mr Nigel Poole, for HMRC, accepted that he could not justify the assessment as having been made under Section 12A but said it was an assessment properly made under Section 13 which was capable of operating in the circumstances. On the facts he said that the decision was one which the Tribunal was entitled to reach.

The Section 13 point

27. The first point is therefore the statutory power. Could the assessment have been properly made under Section 13 of HODA? If it could not then that is an end of this appeal. If it could then it is necessary to go and consider whether or not the Tribunal came to the correct conclusion on the facts.
28. Mr Barlow's submissions adopted some of the reasoning processes of the Tribunal, but not all of them. He contrasted HODA Section 13, with Section 12(1) of the 1994 Act. He said that the latter Act was appropriate and applicable where an assessment was based on estimates and best judgment. The reference to best judgment in that section was to be contrasted with the absence of any such reference in Section 13 of HODA. If there was to be an assessment of Thomas Corneill in respect of anything other than the lorry in which red diesel was found it would have had to have been under Section 12 because on the true construction of Section 13 too much particularity was required by that section and in particular estimates were not allowed. He pointed out correctly that Mr Gilmore's calculations were heavily dependent on estimates and apportionment. This could only be done under Section 12. However, since Section 12 required a default, and since there was no default in this case, it was not applicable to this case. In the circumstances there was, and could have been, no valid assessment.
29. Mr Poole's case was that Section 12(1) could never be applicable to someone in the position of Corneill because no duty was due from Corneill. It was the repayment of a rebate that was due. If Corneill put red diesel in the tanks of its lorries then what was due was the equivalent of rebate. That was not the same thing as an amount to be coming "due in respect of any excise duty" within Section 12(i).
30. I have set out the terms of the Tribunal's decision in relation to this issue on Section 13. It does seem that the Tribunal considered that there had to be some close degree of identity between the fuel said to be red diesel and a particular lorry. I do not consider that the Tribunal was right about this; nor do I accept Mr Barlow's submissions on the point. It does not seem to me that the terminology of Section 12(1)(a) requires that one has to catch a particular vehicle with red diesel in its tank or anything like that. An assessment can be made where it can be demonstrated that oil has been "used or is taken into a road vehicle in contravention of Section 12(2)". It is not possible to read into that part of the section any particular evidential requirements as to how closely one has to tie any particular fuel to any particular vehicle. All one can say about the quality of evidence that underlies such an assessment is that there has to be enough. There is a contravention if it is taken into a road vehicle. That can be demonstrated in a number of ways. The clearest way is a vehicle that is caught with fuel in its tank.
31. Take another case. Suppose that a person is clearly identified as having put something which it is absolutely clear on the evidence is red diesel into a vehicle (because a witness sees him do it), and that vehicle is driven away, and now suppose that that vehicle can no longer be identified because no one kept a note of its registration, or something like that. Can it be seriously suggested that the inability to identify the vehicle prevents Section 13 from operating? That cannot be the case. Nor can any great degree of particularity be read into the provisions of paragraph (a) of that section. The "oil" in question is the oil which is the subject of consideration. Similarly, "the road vehicle" is the road vehicle in question. There has to be a sufficient evidential linkage between rebated oil and use in a vehicle to give rise to an inference that oil in a provable quantity has been placed into a vehicle. Sometimes a great degree of particularity will be available, sometimes it will not. I can see no legislative purpose in defining some sharp cut-off line in a degree of particularity which is required. What is required is appropriate proof and evidence of the facts.
32. Nothing can be read into the absence of a reference to "best judgment" in Section 13. It is true that the expression is used in Section 12 of the 1994 Act, but its absence from Section 13 of HODA is, in my view, not a bar to the exercise of some judgment in the assessment which HMRC is entitled to make under Section 13. It seems to me to be inevitable in the real world, and in many cases, unless a culprit is caught red-handed, that some element of judgment or assessment is going to be necessary to make the section work. I do not see why it should be confined to the red-handed. A recalcitrant haulier may mix red and white diesel from time to time in a manner which makes it impossible to say for certain that a specified quantity was used in a given lorry or lorries at a given time which would enable HMRC to show extremely clearly that over a period of time a given quantity of red diesel was used in unspecified lorries, even if none of them are caught with red diesel in the tanks. I can see no legislative purpose in excluding that situation from the operation of Section 13 and there is nothing in the working of the section which requires it. The reasons of Mr Gilmore in the present case contains a greater degree of assessment and estimation that might be required in my example, but I can see no reason why such a process should be excluded.
33. I therefore consider that Mr Barlow is wrong in his submission that no element of estimation, or no significant element of estimation, is permitted under Section 13. What is required under Section 13 is appropriate evidence. Inferences can be drawn from primary facts. That is a standard process in many walks of life and is appropriate to assessments under Section 13. Estimation in this context is merely one way of describing a process of inference. If it is said that HMRC have got the primary facts or the inference wrong, then an appeal mechanism exits.
34. In the circumstances the Tribunal erred in excluding the possibility of the assessment being under Section 13. I should reiterate that the accompanying letter stated that that was the section that was being invoked and Mr Poole, for HMRC, maintained that that was the basis of the assessment.
35. As well as relying on its own interpretation of the words of Section 13, the Tribunal also relied on the availability of Section 12A of the 1994 Act as an alternative and more appropriate jurisdiction in arriving at its conclusions in relation to Section 13. HMRC has abandoned its submissions below that Section 12A was available as an alternative, and I accept its submission that Section 12 of the 1994 Act cannot apply to a user who uses fuel in a vehicle in contravention of Section 12(2) without defaults.
36. No one has suggested any other process which could justify an assessment in circumstances like those obtaining in relation to Thomas Corneill, so that the alternative available to the Tribunal does not exist. Mr Barlow said that that meant that there could well be a lacuna in the legislation with no means of assessing where what was required was a process of estimation. It is, of course, possible that a lacuna can exist in tax legislation and if the wording of Section 13 of HODA and the rest of the provisions meant that there was a lacuna then that would be that. However, in my view, it is not necessary to limit Section 13 in the manner suggested by Mr Barlow and the Tribunal. It is linguistically and conceptually illogical to limit it in that way so there is no question of any lacuna.
37. I, therefore, find that the Tribunal erred in holding the Section 13 of HODA could not support the assessment in the present case.

The evidential point

38. Certain things are recorded in the decision as having been accepted by Corneill. In paragraph 14 the Tribunal records as follows:

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

Thomas Corneill does not seek to resile from that on this appeal.

39. Mr Barlow relied on Ramon v Customs & Excise Commissioners [2003] STC 150 in support of a proposition that the Tribunal should "concentrate on the question 'what amount of tax is properly due from the tax payer', taking the material before it as a whole and applying its own judgment." (per Chadwick LJ at paragraph 44). Mr Poole did not dispute this. What Mr Barlow said was that on the evidence the Tribunal was not entitled to come to the conclusion that 100 per cent of the disputed fuel was red diesel. The Tribunal had an obligation to look at quantum and made an error in assuming that the suspect invoices were all rebated oil. He pointed out correctly that that was indeed an issue before the Tribunal.
40. The point boils down to one of whether or not the Tribunal was entitled to reach the final conclusion that it did on the basis of the evidence that it had. The only direct evidence of use of red diesel in the lorries was that of the lorry which was actually tested. No other red diesel was found on the premises or in lorries.
41. However, there was indirect evidence. There was evidence that persons known to supply mainly red diesel had received payment. One of the actual alleged suppliers was known to supply red diesel. If legitimate white diesel had been delivered and used one would have expected Thomas Corneill to have been able to demonstrate that clearly. Instead it produced a series of demonstrably false invoices and was unable to supply details of its contacts at the alleged suppliers. The Tribunal was obviously very unimpressed with the quality of evidence from Thomas Corneill, and in particular with the missing evidence.
42. Of course Customs & Excise had to justify its position and it clearly demonstrated that the documentary evidence did not show a clear and legitimate source of white diesel and left many questions which Thomas Corneill had failed to answer.
43. The Tribunal heard the evidence and it assessed the witnesses, particularly Mr Corneill and his explanations. From a starting point of some red diesel found in the tank of one lorry, for reasons which Mr Corneill could not explain, it was clearly entitled, via the rest of the evidence, to reach the conclusion that it did as a matter of inference. It was, therefore, entitled to uphold the assessment. Its decision is not one with which I should interfere even if I had misgivings about it, which I record I do not.

Conclusions

44. In the circumstances I dismiss this appeal.