First-tier Tribunal (Tax)

[2009] UKFTT 228 (TC)

EXCISE GOODS – seizure of cloth woven from imported vicuna yarn and cashmere on basis that no import licence obtained for vicuna – application for retrospective import licence – refused by HMRC – whether refusal reasonable – no – appeal allowed

FIRST-TIER TRIBUNAL (TAX CHAMBER)

TAYLOR & LODGE Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Demack (Judge)

Mr. Jon Denny (Member)

Sitting in public in Manchester on 4 December 2008 and 20 July 2009

Mr. Steven Pollitt solicitor for the Appellant

Mr. Richard Chapman of counsel, instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009
 


DECISION

1. This is an appeal by Taylor & Lodge ("T&L") against a decision on review of the Commissioners for Her Majesty's Revenue and Customs ("HMRC") of 2 November 2007 not to restore excise goods consisting of 17 kilograms of cloth blended from yarn of vicuna and cashmere seized on 14 November 2006. The cloth was seized as a result of T&L's failure to obtain from HMRC a licence for its import, and followed the refusal of DEFRA to issue a retrospective import licence.
2. We should explain that the vicuna is one of two wild South American camelids which live in the high alpine areas of the Andes. Vicunas produce small amounts of extremely fine wool, which is very expensive because the animal can only be shorn once every three years. Vicunas were declared an endangered species in 1974, and although population levels have risen substantially since then, conservation organisations continue to call for active conservation programmes to protect the animals' numbers.
3. Vicunas are covered by CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora) to ensure that international trade in their products does not threaten their survival. CITES works by subjecting international trade in specimens to certain controls. Inter-alia all import and export of species covered by the Convention, of which the vicuna is one, has to be authorised through a licensing system; only if the appropriate document has been obtained and presented for clearance at the port or airport of entry or exit may a specimen of a CITES-listed species be imported into or exported (or re-exported) from a state which is party to the Convention. The United Kingdom is such a party, and the authorities responsible for enforcement of the Convention are DEFRA and HMRC.
4. Under article 4 of Council Regulation (EC) 338/1997 an import permit must be obtained prior to the import of Annex B specimens or their derivatives and be presented to HMRC on arrival of the goods. Vicunas are listed in Annex B.
5. In its reasons for appealing T&L accepted that there had been a "simple oversight" on its part in failing to obtain an import licence, but observed that its failure to do so had resulted in no loss of duty since vicuna wool attracted duty at the same rate as ordinary wool or cashmere. Further, the law did not prohibit the import or export of vicuna wool.
6. In its appeal, T&L was represented by its solicitor, Mr. Steven Pollitt, and HMRC by Mr. Richard Chapman of counsel. We were presented with an agreed bundle of copy documents, and Mr. Pollitt kindly took us through a statement of agreed facts. From Mr. Pollitt's presentation and the content of the various documents before us, we make the following findings of fact.
7. T&L is the leading UK weaver of worsted suitings, having a long and highly respected reputation in the industry. In mid to late 2005 one of T&L's Japanese customers, Itochu Wool Ltd ("Itochu"), asked it to develop a suiting cloth using vicuna yarn which would be spun in Japan to a fineness thitherto impossible. T&L considered itself honoured to have been chosen for the purpose. Sample yarn was produced in Japan and exported to T&L in November 2005. T&L obtained the necessary import licence for the purpose, and wove the yarn into cloth. The resultant trial suit length was shipped to Itochu in March 2006 with the benefit of the necessary export licence. Itochu was satisfied with the fabric produced and in May 2006 placed a full order with T&L for the required cloth.
8. However, at that stage no arrangements were made for delivery of the yarn and T&L expected to receive advance notice of its arrival to enable it to obtain the necessary import licence. But without warning, the consignment was delivered by DHL, Itochu's agent. The consignment was not accompanied by a Japanese export licence, as T&L expected. That was separately delivered by DHL a day or so later, and was in order, correctly describing the consignment delivered as "Vicuna and cashmere blended worsted yarn". (The Latin name for the vicuna is vicugna vicugna).
9. Amongst the documents which accompanied the yarn delivered to T&L and in the bundle before us was DHL air waybill number 227 1344 092. It contains a "Full Description of Contents" as "Vicugna and cashmere blended worsted yarn", which we were told (and accept) would have been prepared by T&L and passed to DHL. The waybill would have been amongst the documentation available for inspection by HMRC on importation of the yarn. Also amongst that documentation was a document headed "CHIEF DTI-E2" which we understand to be a record of information provided to HMRC by DHL relating to the yarn to be processed by T&L. The document is referred to as a "Reprint" and is unsigned. In it, there is reference to "1 Pkg YARN", and an indication of the value of the consignment as OS$44200.
10. We are satisfied, and find, that in relation to the importation of the yarn, DHL acted as agent for Itochu, and not as agent for T&L (see claim in that behalf in a letter of 18 April 2007 from Eaton Smith, T&L's solicitors, to HMRC, the contents of which were not challenged by HMRC).
11. No licence details were entered in Box 44 of the CHIEF form and no CITES licence was presented to HMRC. As a result no HMRC check code was generated to identify the entry for CITES checks on documents or goods, so that the shipment received automatic (route 6) HMRC clearance.
12. When the Japanese export permit for the yarn arrived at T&L's Huddersfield mill, it was immediately sent to its head office in Bradford, where all accounts are dealt with. The two deliveries by DHL were not thought to be connected by members of staff and, T&L admits, once the documentation had been processed by the member of staff responsible for permits and licences, it was "lost in the yarn store system, where it would be assumed that any necessary paperwork had been dealt with".
13. It was not until the cloth had been woven and was ready to be sent to Itochu, so that an export permit for its removal from the UK would be required, that T&L realised that it had not received a permit for the yarn's import. It thereupon sought advice from HMRC, and on 27 September 2006 proceeded to make application to DEFRA for a retrospective import permit.
14. By letter of 1 November 2006 DEFRA refused the application saying that under article 15 of Regulation 865/2006 it might grant retrospective permits only where it was satisfied that:

a) Any irregularities which had occurred were not attributable to the exporter and / or the importer; and

b) The application was otherwise in compliance with the provisions of:

i. Regulation EC 338/97;

ii. CITES; and

iii. The relevant legislation of a third country

The letter continued:

"We have given careful consideration to your application and supporting statement. You say that you were unaware that your supplier had sent the goods until DHL informed you that they had arrived. However, I must stress that, under the Regulations, importers have a duty to ensure that all aspects of the law have been met before they import goods into this country and that lack of knowledge of the law is not an acceptable excuse. Therefore, your application does not meet the criteria at point a above and I regret that your application is hereby refused.

Although there is no formal right of appeal under this legislation, we are of course always prepared to reconsider our decision if you have any new evidence to show that a retrospective permit might be justified. If you have any queries concerning this decision, please direct them to your case officer as above."

15. On 14 November 2006 HMRC gave T&L written notice that, pursuant to section 139(b) of the Customs and Excise Management Act 1979 ("the 1979 Act") and paragraph 1 of Schedule 3 thereto, a blended yarn containing 8.55kg of vicuna and 8.45kg of cashmere was seized as liable to forfeiture by virtue of s.49 (1) (b) of the 1979 Act in that the goods were imported contrary to the prohibition or restriction contained in article 4 of Council Regulation EC 338/97, and s.141 (b) of the 1979 Act having been mixed, packed or found with items liable to forfeiture under the Customs Acts.
16. HMRC commenced condemnation proceedings on T&L appealing against seizure of the shipment of yarn. The hearing took place at Uxbridge Magistrate's Court on 3 September 2007 when the yarn was condemned as forfeit. Amongst the papers before us is a copy of the order for condemnation. It contains no reasons for the District Judge's decision.
17. Notwithstanding the decision in the condemnation proceedings, T&L pursued its claim for restoration of the goods via the tribunal route.
18. In a letter of 14 September 2007 HMRC made their original decision not to restore the yarn to T&L. Amongst the matters taken into account in reaching his decision, the manager taking it referred to an incident in 2006 which was to assume greater importance as the appeal proceeded to the tribunal hearing. The relevant paragraph reads as follows:

"In March 2006 they [T&L] had a problem with a shipment of material containing vicuna when Japanese Customs found that the export permit they presented did not cover 12.3 mtrs of the cloth. DEFRA turned down their requests for a retrospective export permit and the excess was confiscated. It was pointed out to your client by DEFRA, that it was their responsibility to ensure all aspects of the law have been met before exporting goods from this country."

19. On the basis of information provided to us, we find that on that particular occasion T&L contracted to supply a Japanese customer with 80 kilograms of cloth from yarn which it supplied. T&L held all the necessary licences. It is quite usual, and accepted practice within the weaving industry for a worsted cloth manufacturer to produce a woven fabric which is in excess of, or on occasions less than, the ordered quantity. This is because the nature of worsted yarn and cloth production leads inevitably to variations in yields: the cloth manufacturer normally dispatches the produced amount as a matter of working practice. T&L had been in the habit of referring to a quantity of cloth as "a piece" in export documentation rather than to a specific quantity – a practice which, as we understand it, is perfectly acceptable to HMRC. On the occasion in question, an employee unfamiliar with that practice entered the specific quantity of "80 metres" in the documentation. In the event, the yarn provided produced in excess of 92 metres of cloth. In accordance with standard practice, T&L exported the quantity produced to its customer. It appears, and we find, that the UK authorities raised no objection to the exportation, and it was only when the consignment reached Japan that the customs authorities in that country would not allow its importation. T&L applied for a retrospective export licence to cover the additional 12 metres of cloth, but DEFRA refused it. The Japanese authorities then relented to the extent that they allowed the Japanese customer to import the 80 metres contracted for, but not the remainder.
20. T&L claims, and we accept, that the weight of vicuna fibre used was exactly the same as that for which is applied for an export permit: the variation in length was simply a benefit of efficient weaving and finishing of the product, and the fact that less wastage occurred in manufacture than was expected. As T&L points out, it could not have used more vicuna in the product as the amount it possessed was finite.
21. Consequently, we are unable to accept a submission by Mr. Chapman that the matters referred to in the penultimate and last preceding paragraphs constituted an "offence", a factor which DEFRA and HMRC should have taken into account in determining whether to grant a retrospective export licence to T&L. In our judgment, that "offence" was irrelevant and should have been ignored in determining whether T&L should have been granted a retrospective export licence.
22. In a case not dissimilar to the instant one, in August 2006 Johnstons of Elgin Ltd were granted a retrospective export licence. HMRC seek to distinguish that case from the instant one on the basis that this is T&L's second "offence" indicating that it has something less than full regard for the regulations and the reasons for them. Bearing in mind the facts relating to that second "offence", as found above and, in particular, the practice within the weaving industry of supplying the customer with whatever quantity of cloth a given quantity of yarn produces in practice, irrespective of the precise contract terms, we do not consider it relevant in the instant case.
23. Article 15 of Regulation EC 865/2006 is in point in relation to T&L's application for the retrospective issue of an export permit. That article is in the following terms:

"Retrospective issue of certain documents

1. By way of derogation from Article 13(1) and Article 14 of this Regulation, and provided that the importer or (re-)exporter informs the competent management authority on arrival or before departure of the shipment of the reasons why the required documents are not available, documents for specimens of species listed in Annex B or C to Regulation (EC) No 338/97, as well as for specimens of species listed in Annex A to that Regulation and referred to in Article 4(5) thereof, may exceptionally be issued retrospectively.

2. The derogation provided for in paragraph 1 shall apply where competent management authority of the Member State, in consultation with the competent authorities of a third country where appropriate, is satisfied that any irregularities which have occurred are not attributable to the importer or the (re-)exporter, and that the import or (re-)export of the specimens concerned is otherwise in compliance with Regulation (EC) No 338/97, the Convention and the relevant legislation of the third country.

3. Documents issued pursuant to paragraph 1 shall clearly indicate that they have been issued retrospectively and the reasons for such issue. In the case of Community import permits, Community export permits and Community re-export certificates, that information shall be indicated in box 23.

4. The Secretariat of the Convention shall be notified of export permits and re-export certificates issued in accordance with paragraphs 1, 2 and 3."

24. In paragraph 1 of a letter of 20 December 2006, which effectively summarises HMRC's position as advanced by Mr. Chapman, Mr. E J Hounslow of DEFRA dealt with the interpretation of article 15 of the Regulation. He set out the criteria for the management authority of a convention state "exceptionally" to issue retrospective documentation for the import or export of items covered by the Regulations as follows:

"a) That the importer or the (re-)exporter informs the management authority on arrival or before departure of the reasons why the required documents are not available

b) That following consultation with the competent authorities of the third country the management authority is satisfied that any irregularities which have occurred are not attributable to the importer or the (re-)exporter; and

c) That the import (in this case) is otherwise in compliance with the Regulation (EC) No 338/97, the Convention and the legislation of the third country"

The letter continued at paragraphs 2 and 3 as follows:

"2. We believe that the correct interpretation of 1) above is that an importer must inform us at the time of import and that an exporter / re-exporter must inform us prior to (re-)export. In this case the import of the goods into the UK without an import permit was clearly contrary to the EC Regulations. In order to benefit from the derogation in Article 15 your client should have notified the CITES Management Authority (DEFRA) on arrival of the goods of the reasons why the required documents were not available. To interpret the Regulation in the way that you have means that an importer could illegally import CITES listed goods and could then inform us at any time that they now required a retrospective import permit to "legalise" the move. We do not believe this to be the intention of the Regulations.

3. Secondly we do not believe that your clients satisfy the second of the above criteria in that the irregularity was quite clearly attributable to either your clients or their agents – the "Japanese customers" i.e. the re-exporters. The cloth was ordered and was expected by your clients and as far as we can gather a contract was in place and all parties were aware that the re-export from Japan to UK was due to take place at some time in the immediate future. There does appear to be some confusion as to whether your clients did not obtain an import permit through an oversight (Taylor Lodges letter of 31^st October 2006 to HM Revenue or Customs) or whether it was due to the Japanese customer (the re-exporter) not following normal commercial practice. (Your letter of 10^th November). However we feel that in either case the criterion is not satisfied and that we therefore cannot exercise our discretion under this Derogation."

25. We can usefully deal with Mr. Pollitt's submission, both as presented orally and in correspondence with both DEFRA and HMRC, whilst both discussing evidence and submissions and reaching our own conclusions on them.
26. First, we observe that HMRC appear to take a narrow view of the meaning of "exceptionally" so that it assumes an exaggerated definition far removed, indeed at the opposite end of the spectrum, from the Oxford Compact Dictionary definition of "not typical". We are quite content to proceed on the basis of that dictionary definition.
27. Next, we deal with the "correct interpretation" of article 15. It will be recalled that paragraph 1 of that article provides that retrospective import or export documentation may exceptionally be issued where "the importer or (re-)exporter informs the competent management authority on arrival or before departure of the shipment of the reasons why the required documents are not available". HMRC invite us to rewrite that proviso so that it reads "the importer informs the competent management authority on arrival of the shipment and the (re-)exporter does so before departure of the shipment of the reasons etc". We are not prepared to do so: we have no authority in that behalf and, in any event, consider it unnecessary. A taxpayer such as T&L is entitled to rely on paragraph 1 as it is written, and not be forced to accept an interpretation that the authority would like to put upon it. Consequently, we hold that the authority may "exceptionally" issue retrospectively an import licence in circumstances such as those in which T&L made application.
28. Thirdly, and finally, we observe that on the basis of the evidence presented to us, and as outlined by Mr. Chapman, the "irregularity" was not attributable to T&L or its agents. As we found earlier (see 10 above), DHL acted as agents for Itochu, and not for T&L.
29. There are two other points we should make. First, we note that vicuna yarn is obtained by the shearing of vicuna and not from any process that involves the killing or maiming of the animal. In that case, we would expect the authority to take a somewhat less serious view of a breach of the regulations than might otherwise be the case. Secondly, we note that there are no taxation implications whatsoever in T&L's breach of the regulations; the only consequence of HMRC's refusal to restore the cloth to T&L in the instant case is that it has been unable to sell it, thus suffering a commercial loss.
30. T&L has admitted to having made a mistake in failing to obtain an import licence for the vicuna yarn on its arrival from Japan. We accept that it was a simple error and nothing more, so that we regard the matter as much less serious than HMRC and DEFRA have treated it.
31. Lest it be thought that we are taking a particularly lenient view of what happened in the instant case, we record that we fully appreciate the need for CITES and support the regulations made for the protection of flora and fauna under its auspices.
32. However, in the instant case we consider HMRC (and DEFRA) in refusing to restore the cloth to T&L to have reached a conclusion which no reasonable body of Commissioners could have reached. We therefore allow the appeal, and direct HMRC to carry out a further review of their decision not to restore the cloth to T&L. (We are here dealing with what the Finance Act 1994 defines as an "ancillary matter" so that we are unable to direct HMRC to restore the cloth to T&L).
33. Mr. Pollitt made application for T&L's costs in the event of its appeal succeeding. His application was opposed by Mr. Chapman. In all the circumstances of this case, we consider an award of costs to be appropriate, and therefore direct HMRC to pay T&L's costs calculated on the standard basis either as agreed or, in default of agreement, as assessed by a costs judge.

MAN/2008/8067

DAVID DEMACK

JUDGE

Release Date: 28 August 2008