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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> United Kingdom VAT & Duties Tribunals (Customs) Decisions >> FG Wilson (Engineering) Ltd & Anor v Revenue & Customs [2008] UKVAT(Customs) C00251 (23 January 2008)
URL: http://www.bailii.org/uk/cases/UKVAT/Customs/2008/C00251.html
Cite as: [2008] UKVAT(Customs) C00251, [2008] UKVAT(Customs) C251, [2008] V & DR 1
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F G Wilson (Engineering) Ltd & Caterpillar EPG Ltd v Revenue & Customs [2008] UKVAT(Customs) C00251 (23 January 2008)
    C00251
    CUSTOMS DUTIES – Inward processing relief – Unlawful removal of goods – Export declaration – Wrong Customs Procedure Code entered in Box 37 – Whether use of wrong CPC constitutes unlawful removal of goods for purposes of Article 203 of Code and/or Article 865 of Implementing Regulations – Questions referred to ECJ
    CUSTOMS DUTIES – Goods under suspension – Inward processing relief – Re-export – Prior notification – Whether prior notification under Article 182(3) duly given to Customs authorities – No
    CUSTOMS DUTIES – Customs declaration – Amendment – Box 37 erroneously uses export CPC where suspension goods were re-exported – Whether actual declaration should be amended and correct CPC substituted – Article 78(3) of Code
    CUSTOMS DUTIES – Remission – Erroneous declaration – No obvious negligence – Should Customs' debts arising by operation of Article 203 of Code and/or Article 865 IR should be remitted under Article 239 of Code

    THE NORTHERN IRELAND TRIBUNAL CENTRE

    F G WILSON (ENGINEERING) LTD & CATERPILLAR EPG LTD Appellant
    • and –

    THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

    Tribunal: SIR STEPHEN OLIVER QC (Chairman)

    Sitting in public in London on 10-13 and 16-19 June 2007 and 22 and 23 November 2007 and in Belfast on 26 November 2007

    Roderick Cordara QC, instructed by Deloitte, accountants, for the Appellants

    Sarah Moore, counsel, instructed by the general counsel and solicitor for HMRC, for the Respondents

    © CROWN COPYRIGHT 2007

     
    DECISION
  1. F G Wilson (Engineering) Ltd ("F G Wilson") and Caterpillar EPG Ltd ("Caterpillar"), the Appellants, appeal against review decisions of 31 January and 24 March 2006. The decisions concern post clearance demands made on 18 October 2005 in the sums of £31,568,858.63 (F G Wilson) and £3,936,048.07 (Caterpillar).

    2. Background summary
  2. F G Wilson (and Caterpillar during the period to which this appeal relates) have traded from Larne in County Antrim. In the course of their trades of manufacturing and exporting generator sets, those two companies (which will be referred to as "the Appellants" from now on) have imported component parts from outside the EU, mainly from the US, and assembled these into generator sets. The Appellants have been authorised to use the "inward-processing relief" ("IPR") procedure in relation to those imported goods. The goods in question have been duly entered for IPR as "goods intended for export from the customs territory of the Community in the form of compensating products" (Article 114 of Council Regulation 2913/94, "the Code"). Due compliance with IPR, which applies only so long as those goods are not released for free circulation, enables those goods to be used in the EU without being subject to import duty.

  3. On 21 February 2005 the Appellants disclosed to HMRC that they had used the incorrect Customs Processing Code ("CPC") when re-exporting goods (which had become "compensating products" : see Article 114.2(d)) such that those goods had therefore appeared on the face of the customs export declaration (a single administrative document, "SAD", on Form C88) to have been goods manufactured within the Community for free circulation within the Community. The disclosure was followed by the decisions of HMRC to make the post clearance demands. The demands covered the period from 18 October 2002 until 28 February 2005. The decisions were, as noted, upheld following a review.

  4. The errors of the Appellants in using the wrong CPC had, so HMRC concluded, meant that the Appellants had failed to comply with the "prior notification" requirement set out in Article 182(3) of the Code. The other consequence of the errors, HMRC have contended, has been to bring Article 865 of Commission Regulation 2454/1993, the Implementing Regulation, ("IR") into operation. Article 203(1) of the Code provides that:

    5. "A customs debt on importation shall be incurred through – the unlawful removal from customs supervision of goods liable to import duties."

    Article 865 IR states that –

    "… the presentation of a customs declaration for the goods in question, or any other Act having the same legal effects, and the production of a document for endorsement by the competent authorities, shall be considered as removal from customs supervision within the meaning of Article 203(1) of the Code, where these acts have the effect of wrongly conferring on them the customs status of Community goods".
  5. To explain the background more fully, a trader who is authorised to use a customs procedure with economic impact ("CPEI"), such as inward processing (a suspensive system), becomes entitled to suspension of payment of customs duty and input VAT when the goods are declared to the procedure. The purpose of the CPEI (which includes temporary importation and customs warehousing) is to facilitate international trade and encourage economic activity to take place in the EU. Under these procedures duty and VAT become payable only if the goods are subsequently released to free circulation in the EU; they are not payable if the goods are re-exported.

  6. Use of CPEIs is subject to certain conditions of which, HMRC say, prior notification of re-exportation in pursuance of Article 182(3) of the Code is one.

  7. The UK customs authorities, in common with those of several other Member States, accept that the requirement of prior notification can be met by the trader identifying that the goods are subject to an inward processing procedure (or another CPEI) on the export declaration (form C 88, the Single Administrative Document (the "SAD")); to satisfy the requirements of Article 161(5) of the Code the C88 is to be lodged at the customs office responsible for supervising the place where the exporter is established or where the goods are packed or loaded for shipment. That identification is made by using a series of numbers on the export declaration that correlates to the correct CPC. For general export from the EU the CPC will start in the "10" series. For temporary exports the CPC will start with a number in the "20" series and for goods being re-exported the series will start with a number in the "31" series. Where goods have been subject to import reliefs the first two numbers of the import code become the third and fourth digit of the re-export Code. A CPC example for goods re-exported from IPR suspension (Code 51) would therefore start 31 51. The final two digits of the CPC determine any additional controls in place.

  8. The appeals, as already mentioned, have arisen because the Appellants used the wrong CPC on their export declarations. Instead of using the CPC starting in the 31 series, that would have identified the goods subject to a CPEI, they used a CPC starting in the 10 series. This mistakenly identified them as goods that had been manufactured in the UK for free circulation into the Community or had been imported from a third country on which all import charges had been paid. The Appellants thus erroneously declared that the goods were general exports from the Community where they should have declared that they were being re-exported as compensating product under a CPEI. In the case of both Appellants the CPC 100001 was used instead of the CPC 315100. Therefore not only did the first two digits of the CPC fail to state that the goods were being exported pursuant to a CPEI, but also the third and fourth digits failed to state that the goods had been imported pursuant to IPR suspension.

  9. On the assumption that the errors brought into play Article 203 of the Code as implemented by Article 865 IR and gave rise to a debt, the Appellants have become liable on exporting the goods to duty of some £35.5 million. Had they used the correct CPCs on exporting the goods, their suspended liabilities would have been discharged completely and the purposes of the CPEI of inward processing relief would have been achieved.

  10. The case for the Appellants can be briefly summarised. Article 865 IR does not bear the interpretation placed on it by HMRC; their mistaken use of the number "10" in Box 37 cannot be taken to have had the effect of wrongly conferring on the IPR goods (the generator sets) the status of Community goods when (i) those goods have been notified to customs on entry into IPR as goods intended for re-export and shown as re-export in the "disposals" part of their IPR returns and (ii) HMRC knew or must be taken to have known that all the goods exported by them to outside the customs territory of the Community invariably contained IPR ingredients.

    11. Did the use of the wrong CPC serial numbers in Box 37 of Form C88 create a customs debt?
  11. HMRC based their claim to the customs debt on the grounds that the mistaken use of the CPC serial number "10" (connoting export) in Box 37 amounts to "the unlawful removal" of the generator sets "from customs supervision" as those words (taken from Article 203 of the Code) have been implemented by Article 865 IR. By using the CPC serial number "10" in Box 37 of the C88 the Appellants (through their agents, the freight forwarders) declared the generator sets as goods for export: see the legend in Annex 37 of the Implementing Regulations which contains the explanatory notes to the SAD and states that the code to be used for Box 37 is to be 10 for "export" and 31 for "re-export after a customs procedure with economic impact". HMRC rely on the fact that only Community goods qualify for the "export procedure": see Article 161(1) of the Code and see Article 14(16)(h) of the Code which makes "export" a customs "procedure". It follows that the mistaken use of 10 in Box 37 "wrongly confers", in the sense that "it purports to confer", on the generator sets the customs status of Community goods and constitutes the removal of the generator sets from customs supervision within the meaning of Article 203(1) of the Code and results in a customs debt being incurred under Article 203(1).

  12. "Customs status" is defined in Article 4(6) of the Code to mean "the status of goods as Community or non-Community goods." "Community goods" are defined in Article 4(7) to mean, among other things, goods obtained within the Community and not incorporating goods incorporated from non-EU countries and imported goods that have been released for free circulation. "Non-Community goods" are defined in Article 4(8) to mean "goods other than those referred to in subparagraph (7)".

  13. The generator sets in question are "compensating products" by virtue of Article 114(2)(d) of the Code. This is in the context of the IPR scheme found in Article 114 which, in essence, ensures that import duties do not apply when non-Community goods which are intended for re-export from the customs territory of the Community in the form of "compensating products" are used in the Community customs territory in one or more processing operations. HMRC do not (and could not in the face of the words of Article 114) allege that the use of the "export" CPC serial number actually conferred on the generator sets the status of Community goods. They say, as already noted, that by using the "export" serial number 10 the Appellants were "wrongly conferring", in the sense of purportedly conferring on those goods, the status of Community goods in circumstances where those goods do not actually have that status.

  14. The central question, expressed in terms of Article 865 IR is whether the presence of an export declaration for a generator set (i.e. a Form C88 with Box 37 mistakenly filled in with "10…") has had "the effect of wrongly conferring on [it] the customs status of Community goods".

    15. Overview
  15. Before examining the arguments in detail, I should explain that, in my view, there is an inherent improbability about HMRC's position on the application of Article 865 IR. The article, as construed by HMRC, has a penal effect. Liability to 100 per cent of the suspensive tax, which would otherwise be have been wholly discharged, is caused by inadvertent mistake on the trader's part; had the trader meant the goods to be released into free circulation, liability would have arisen under Article 201. Article 865 IR cannot have been designed as a trap for the inadvertent. It cannot have been the intention that ignorance or inadvertence of traders should contribute to the "tax base". The framers of the legislation more likely had in mind that each member state would have its own proportionate penalty regime to coerce the inadvertent trader into compliance. (Parliament gave the UK customs authority that tool, but too late to be employed in the present circumstances.)

    16. The generator sets never entered the export procedure
  16. The goods, i.e. the generator sets, were at all times non-Community goods in fact and in law. Nothing had taken place that could, rightly or wrongfully, have had the effect of giving them the different legal status of customs goods as defined in Article 4(7) of the Code. This is because they have neither been wholly obtained in the customs territory of the Community nor been imported from outside and released for free circulation. (If they had been released for free circulation, a debt under Article 201 of the Code would, as I have just observed, have been triggered. As will be seen, the monthly IPR returns made by the Appellants to HMRC were compiled on the basis that the goods in question, i.e. those to which "10" had been attributed in the export declaration, had not been released for free circulation.)

  17. The goods cannot therefore be said to have been placed under the export procedure. That is available only to Community goods: see Article 161(1) of the Code. The use of the wrong CPC serial number purporting to place the generator sets, notionally, under the export procedure cannot therefore have had the effect of giving the generator sets the legal status of Community goods.

    18. The generator sets did not leave customs supervision
  18. Moreover, even if the wrong use of the CPC serial number 10 had operated as a de facto passport into the export procedure, the generator sets would still have been under the supervision of "the customs office responsible for supervising the place where … the goods are loaded for export shipment": see Article 161(5) of the Code. This feature is relevant to the role that Article 865 IR plays in implementing Article 203(1) of the Code. The debt under Article 203.1 is triggered by "the unlawful removal from customs supervision of goods liable to customs supervision". The Recital to the Implementing Regulations states that "the following constitute a particular form of removal from customs supervision: "the customs declaration for the goods in question" and "any other acts that have the same legal effects … where the effect of this declaration [or] act … is that the legal status of Community goods is wrongly conferred on the goods liable to import duties". The wrong use of the CPC serial number 10 does nothing to confer the "legal status of Community goods" on the generator sets. It gives the wrong message to or leaves an erroneous impression with the recipient of the Appellants' C88s (i.e. HMRC's computer system known as CHIEF); but no "legal effects" result and in particular no change of legal status is wrongly conferred on the generator sets. The wording of Article 865, i.e. having "the effect of wrongly conferring on them the customs status of Community goods", must be read in a manner that complies with the intendment of the Recital and the clear scope of Article 203(1) of the Code. The generator sets were not removed from customs supervision either actually or constructively; the mistaken use of the CPC serial number 10 in the C88 may be read as purporting to confer the status of Community goods on the generator sets (which is the way HMRC put their case), but it cannot be read as giving those generator sets a status that removes them from customs supervision, being a status that is legally different from the status conferred on them by Article 114(2)(d).

  19. On this topic, it will be seen that Article 4(13) of the Code defines "Supervision by the customs authorities" as meaning action taken by the authorities "with a view to ensuring that customs rules and, where appropriate, other provisions applicable to goods under customs supervision are observed". The Appellants' CPEI authorisation has at all times been subject to Article 86 of the Code which requires that the customs authorities can at all times supervise and monitor the procedure. Whether Box 37 of the C88 is filled in with a 10 or a 31 serial number, the goods remain supervised. Article 182(3) of the Code directs that, when goods are for re-export, Article 161(5) (which is concerned with supervision of the place of export) applies. Where the goods are placed under export procedure, Article 56(2) of the Code provides that they become subject to customs supervision and remain as such until they leave the customs territory of the Community; and Article 161(5) applies likewise.

    20. Use of the wrong serial number interferes with HMRC's monitoring procedures
  20. HMRC made the point supported by the evidence of Mr Colin Davis (a customs officer responsible for policy in this field) that the use of the CPC serial number on the export declaration (C88) enables customs, through the use of their central computer system (CHIEF) to capture the data, to calculate duties and to make appropriate checks. The numbered data fields match the boxes found on Form C88. This enables CHIEF to create profiles and to identify goods and exporters as likely candidates for further checks. Relevant to the present situation, the CHIEF profile can alert customs where there is a risk that CPEI goods are not actually being re-exported but are being diverted to free circulation. If a CPC is entered which starts in the 10 series (connoting goods in free circulation) any profile set in relation to re-export CPCs or CPEI goods would be circumvented. I fully acknowledge this point, but does it mean that the goods in question, the generator sets, have had wrongly conferred on them the status of Community goods? The answer must be – No. All that has happened is that the wrong message has been conveyed to CHIEF. That is a compliance failure on the Appellants' part and in a well-ordered system it would have earned a compliance penalty. However the Appellants' wrong use of the 10 series in Box 37 cannot, on those grounds, have occasioned a customs debt where none would have been due had the 31 series been used.

    21. The status of the re-exported goods in the Appellants' IPR returns
  21. The evidence as a whole shows a more fundamental reason why Article 865 has no application here. It is this. With every IPR return submitted monthly by the Appellants, the true state of affairs has been presented to and acted on by HMRC. Every re-export has been properly described in each return. The consequence is that HMRC now appear to adopt the inconsistent approach of alleging that the C88s show the re-exported goods as having been released to free circulation and placed in the "export" procedure while at the same time acknowledging that the same goods were duly "re-exported".

  22. The background to this is as follows. From 1974 onwards F G Wilson (and much later Caterpillar EPG) have been authorised to use the CPEI of IPR. Details of the IPR authorisations throughout the period relevant to the present dispute (i.e. mid-2002 to January 2005) were worked out between Joanne McLean, staff accounting with F G Wilson, and Jennifer Addis, higher officer in local compliance of HMRC's base in Belfast. The Appellants were regarded by Customs and Excise (as it then was) as compliant traders experienced in IPR. Joanne McLean was in regular contact with Jennifer Addis on all manner of IPR-related issues.

  23. Authorisation was renewed annually until 2004. Applications were handled by Joanne McLean and Jennifer Addis. They covered both F G Wilson and Caterpillar EPG. Jennifer Addis gave details of the authorisation procedure and provided documents relating to the IPR. There was mutual understanding between the Appellants and HMRC as to each others' systems for managing the IPR process. As the Appellants sought to improve and upgrade their own systems, the details were disclosed to HMRC.

  24. The Appellants made a renewed application for authorisation of IPR suspension to take effect from 18 January 2002. A letter of 17 December 2001 explained the Appellants' computerised recording systems. The formal application of 8 January 2002 requested authorisation for both IPR and "processing under customs control" (another CPEI). (The processing under customs control procedure was discontinued in mid-2002.) The provisional authorisation letter of 18 January 2002 contains the following points relevant to the present issue.

    25. (i) The Appellants are required to use the 510000 CPC on its entry documentation. (The relevant entry documentation for goods using IPR suspension is the Form C88 which, in Box 37, requires the entry of a CPC in the 51 series: see Customs Notice 221 paragraph 10.1.)
    (ii) The Appellants are required (where appropriate) to use "the following CPC on your disposal document, i.e. those appropriate for transfer to IPR suspension to PCC and those appropriate for disposal of goods from PCC". (The latter is silent as to what CPC is to be used.)
    (iii) All compensating products or goods in the unaltered stated "must be made available for inspection by C&E before disposal". (This is drawn from Article 120 of the Code which enables such restrictions to be imposed on non-Community goods in the IPR regime.)
    (iv) Goods covered by the authorisation are not to be destroyed without Customs & Excise approval (this is drawn from Article 182(3) of the Code which prohibits destruction of non-Community goods without prior notification.)
    (v) Condition 16 of the approval requires the goods entering IPR to be disposed of as compensating products or in an unaltered state within 12 months.
    (vi) Condition 19 requires that:
    "Your records must indicate at all times, the quantity of goods entered to inward processing (including port of entry, entry number and date) and their transfer to PCC, the disposal of all compensating product and/or goods in an unaltered state and all particulars necessary for the monitoring of the approved operations."
    (vii) Condition 21 requires the returns (C&E 812) to be submitted monthly.
  25. The final authorisation letter for use of the IPR suspension system for the period 19 January 2002 until 18 January 2004 (apparently sent by HMRC on 9 October 2003) states, in place of point (ii) above, that "where appropriate, you must use the following CPC on your disposal documentation 315100". Condition 23 is new: it states:

    26. "You are authorised to release goods to free circulation on a general basis. This gives you the choice of submitting a diversion entry on form C88 for the goods you put onto the community market either at the time of diversion or at the same time as you submit your suspension return Goods released for free circulation on a general basis with periodic submission of diversion entries may incur additional compensatory interest charges."

    The letter ends with the direction to the Appellants to use the simplified authorisation procedure and to ensure that they obtain the appropriate export evidence (as prescribed in paragraph 50.8 of Notice 221, i.e. SAD Copy 3) from their agents. (Until the 1999 reorganisation of the Caterpillar group, only one agent had been used: from then several freight forwarders had been used.)

  26. The Appellants duly made monthly IPR returns to HMRC on Forms C&E812. These required monthly details of all the following:

    27. (A) Goods imported to IPR;
    (B) Goods received from other authorised IPR traders;
    (C) Disposals eligible for duty relief, showing individual entries under the heading "Method of Disposal" for "export from the EC" and
    (D) Goods diverted to free circulation.

    The C&E 812s were signed with the declaration – "except as indicated …, all IPR goods have been accounted for by eligible disposals of compensating products …".

  27. Schedules covering Section C above (re-export) were supplied as exhibits to Jennifer Addis' evidence and they show the use of the CPC number in the 31 series against all disposal returns of re-exports. (This was not apparently a requirement of the authorisation.)

  28. There may have been points of detail raised by Jennifer Addis, but otherwise there is no dispute that the monthly IPR returns were regarded as accurate and complete by both the Appellants and HMRC. The effect of each monthly return is therefore to ascribe to each item of compensating product, until the time of disposal, its unchanged status of non-Community goods. This circumstance introduces an element of unreality about HMRC's case. They say that the wrong use of the 10 series in Box 37 of the C88 has had the effect of wrongly conferring on the goods in question the customs status of Community goods. But all that has happened is that CHIEF has been misinformed. As between the Appellants and the customs authorities in Belfast, the goods have retained their status as non-Community goods until leaving the customs territory of the Community.

    29. Is the present situation the reason for Article 865 IR's inclusion?
  29. Article 865 IR is not otiose. There must be situations where it will operate such that a customs debt is incurred under Article 203 of the Code. The opening words of Article 865 IR set out a wide range of circumstances where that provision could operate. These cover customs declarations, any other acts having the same legal effects and the presentation of documents for endorsement. All of those declarations, documents and acts will have a part to play at any time when the goods are removed from supervision. Supervision means action taken by the customs authorities to ensure that "customs rules" and "other provisions applicable to the goods subject to customs supervision" are observed: see Article 4(13) of the Code. The declarations, documents and acts may therefore relate to events before, during and after the customs approved treatment or use or customs procedure in question. The present situation, where the compensating products being actually re-exported are erroneously entered in Box 37 as being in the procedure of "export", cannot be the only situation to which Article 865 IR applies. Thus to conclude that it does not apply here is most unlikely to deprive Article 865 of any meaning. Neither side has provided any convincing examples of circumstances where Article 865 IR does apply. Nonetheless even if no occasion for the application of Article 865 can be suggested, it does not mean that by process of elimination the Article must create a customs debt in the present circumstances. Liability to taxes and duties cannot depend on inference alone.

  30. If there is to be an enforceable customs debt, it must be based on a clearly worded charging provision. Otherwise the trader is denied legal certainty. Customs have based their claim on a concept of constructive removal of the generator sets from customs supervision. The inference they seek is that the generator sets destined for re-export have been notionally transformed from non-Community goods into Community goods on the strength of the erroneous use of the 10 series in the CPC Code which applies to the export of Community goods. But the expression "has the effect of" requires a real consequential change to have resulted from the action. It does not follow from the erroneous use of the 10 series that the goods were removed from customs supervision either actually or constructively; they were merely wrongly designated as goods for export.

  31. For those reasons, I conclude that the customs claim for the customs debt fails. The rest of this decision aims to deal with the three other points that arose in the course of argument but which are now academic.

    32. Should there be a reference?
  32. I have given careful consideration to the question of whether there should be a reference of the Article 865 IR point. Despite my conclusion that HMRC are wrong, I fully recognise that they, perhaps against their better judgment, are fighting the corner of the Commission. There is an evident difference of opinion on this matter within the Community. A further consideration is that the Appellants are one group of three different groups of litigants on this matter. The appeal of the Appellants on this matter (which must be a probability if there is no reference) will lie to the Court of Appeal of Northern Ireland. Another group of litigating traders are based in England and Wales. For them the appeal from this tribunal will lie to the Chancery Division of the High Court of England and Wales. The remaining litigant (Terex Equipment Ltd) is based in Scotland and HMRC's appeal against my ruling will lie to the Inner House of the Court of Session sitting as the Court of Exchequer in Scotland. Those considerations necessitate referring the case to the European Court of Justice now. The alternative would be multiple litigation. So, without undermining my view as to the unsustainability of HMRC's claim to the customs debt (in reliance of Article 203 of the Code and Article 865 IR) in the present situation, I think this matter should be referred.

    33. Prior notification
  33. Article 182 of the Code is a stand-alone provision in Section 2 of Chapter 3 of Title IV of the Code. The heading of Chapter 3 is "Other types of customs-approved treatment or use". Article 182 covers three specified forms of customs-approved treatment or use, namely re-exportation, destruction and abandonment to the Exchequer of non-Community goods. It applies therefore to goods under suspension and other CPEIs. Article 182(2) directs that:

    34. "Re-exportation shall, where appropriate, involve application of the formalities laid down for goods leaving, including commercial policy measures."

    Article 182 contains three directions, the first of which is relevant to the present circumstances:

    "Save in cases determined in accordance with the committee procedure, re-exportation or destruction shall be the subject of prior notification of the customs authorities."

    The words "re-exportation or" are, according to Council Regulation (EC) 648/2005 Article 1 paragraph 15, to be repealed. As yet however the repeal has not been implemented.

    Are the conditions of Article 182 of the Code too transient to be regarded as required by the system?
  34. The Appellants make the point that because the specific reference to prior notification of re-exportation has such a short life, the present case should be decided in its absence and by reference to the enduring provisions of Article 182. Customs and Excise point out that the new version of Article 182(3), which is not yet in force, does indeed remove the obligation of prior notification. However the new version maintains an obligation to make a customs declaration and, where a customs declaration is not required, imposes an obligation to lodge a summary declaration. The declaration in question must contain the particulars "necessary for risk analysis and the proper application of customs controls". The effect of the new version of Article 182(3), if and when implemented, is (point out HMRC) consistent with the practice in the UK and other Member States that prior notification under the present form of Article 182(3) may be made on the basis of the customs declaration (i.e form C88); the new version has the effect of strengthening and particularising the obligation on the trader in respect of information that must be contained in the direction so as to enable risk analysis and proper application of customs controls to take place.

  35. I accept the argument for HMRC. There is and remains an obligation on the trader to lodge a declaration of re-exportation and this will not be discharged by the use of the CPC denoting the procedure of export.

    36. Did pre-notification take place on entry to the CPEI?
  36. As I understand their argument, the Appellants contend that they have actually complied with Article 182(3) by the original C88 that entered the imported goods to IPR procedure. That announced to HMRC the intention to re-export those goods and when in due course the commercial documents covering the actual exportation (e.g. bills of lading) were tendered, the totality of the information conveyed to HMRC must be taken to have amounted to the prior-notification of re-exportation. I do not agree. Article 182(3) covers re-exportation and destruction. Both are customs approved treatments or uses. Both relate to goods that are not in free circulation. Unless HMRC are actually giving details of the "use" to which the particular goods are to be put, HMRC cannot carry out their duty of supervision: nor can they be satisfied that the use is "customs approved".

    37. The heading to Box 37 is misleading
  37. I acknowledge the Appellants' point that Box 37 of C88 conveys a misleading message to the re-exporter. It is headed "PROCEDURE". Re-exportation is not a procedure; it is a customs approved treatment or use. Public Notice 221 of January 2003 explains the CPC 31 series (said in the text to mean "re-exportation of IPR suspension goods outside the EC") under the heading – "Exporting Suspension Goods" (my italics). While these may be potentially misleading features to be taken into account when determining whether the trader, such as the Appellants, has been "obviously negligent", they do not alter the fact that, for Article 182(3) purposes, there was no prior notification.

    38. Did HMRC have actual knowledge of re-exportation?
  38. Did HMRC know that all the "exports" of the Appellants were in fact re-exportations of IPR products? It was argued for the Appellants that HMRC had had long experience and a detailed knowledge of their business. It was inconceivable that a complex machine being exported from the EU such as the present generator sets would not contain imported parts or elements. HMRC, it was argued, knew from the operation of the IPR system by the Appellants that this was likely to be the case.

  39. In support of their contention, the Appellants relied on the evidence of Cathryn Turner who had been employed by Caterpillar EPG since 1 July 2004 as indirect tax manager. She said that it had been her understanding that Customs had access to details on export declarations and any comparison of these with the Appellants' IPR returns which disclosed re-exportations would have revealed a significant mismatch between the export declaration information and the information of re-exportations returned on the IPR returns. Also in support of the contention that HMRC knew all along that all exports were in fact re-exportations of IPR products, the Appellants referred to a report by Christopher Roberts of HMRC who had investigated the matter in May 2006. In that report, he states that Jennifer Addis had confirmed that she knew that 100% of exports included IPR goods. He concluded that customs did know the nature of the Appellants' business and that a simple verification exercise comparing the export codes and IPR returns would have thrown out an immediate warning; however, he observed, "no such system based information is available in this regime and the trader was allowed to continue use of a code that gave no advantage but eventually resulted in an assessment".

  40. Giving evidence for HMRC in response, Jennifer Addis contested the accuracy of the Roberts' statement; she had not, she said, known that all the Appellants' exports contained IPR goods and she would not have considered the matter at the relevant time. Tracey Houghton, a customs and internal trade tax specialist with HMRC, had taken on the role of tax specialist for the casework of F G Wilson. Her evidence was that she had not known that all the re-exportation goods contained IPR goods. Her view was that, if anyone were to have actual knowledge of that fact, it could only have been the local compliance officer, i.e. Jennifer Addis and latterly herself. She explained that until July 2002 when the "New Export System" was introduced, HMRC had had no facility for viewing export data on its Management Support System ("MSS"). Even since then, interrogation of export declarations on MSS would not have been possible without the trader providing the export entry numbers, and even then HMRC would need the appropriate commodity codes to enable them to access the large volume of actual export declarations.

  41. The evidence does not persuade me that HMRC knew or should have known that all the Appellants' exports were in fact re-exports of IPR products.

    42. Conclusion on Article 182(3) of the Code
  42. To summarise : even if it had been possible for HMRC to have discovered by analysis of the MSS system and other research that the Appellants' re-exportations had contained IPR goods (which is not established) and even if HMRC's compliance officers had actually known (which they did not) that all the Appellants' exports contain such goods, these features would not, in my view, have amounted to pre-notification within Article 182(3) of the Code.

  43. For those reasons I am against the Appellants as regards their contention that prior notification had taken place for the purposes of Article 182(3) of the Code.

    44. The Article 78(3) issue
  44. Does Article 78(3) of the Code operate in the present circumstances to enable HMRC to revise the export declaration by substituting the correct re-exportation CPC serial number?

  45. So far as relevant Article 78 reads as follows:

    46. "1. The customs authorities may, on their own initiative or at the request of the declarant, amend the declaration after release of the goods.
    2. The customs authorities may, after releasing the goods and in order to satisfy themselves as to the accuracy of the particulars contained in the declaration, inspect the commercial documents and data relating to the import or export operations in respect of the goods concerned or to subsequent commercial operations involving those goods. …
    3. Where revision of the declaration or post-clearance examination indicates that the provisions governing the Customs procedure concerned have been applied on the basis of incorrect or incomplete information, the Customs authorities shall, in accordance with any provisions laid down, take the measures necessary to regularise the situation, taking account of the new information available to them."
  46. Application was made to HMRC for a revision of the export declarations; it was turned down essentially for the same reasons as appear in HMRC's argument in this appeal.

    47. The case for HMRC
  47. The condition that engages Article 78(3) of the Code is that "the provisions governing the customs procedure concerned" must be shown "to have been applied on the basis of incorrect or incomplete information". In the present circumstances HMRC construe "the customs procedure concern" that has "been applied" has been the procedure of "export". The export procedure was, they say, applied on the basis of the incorrect information supplied by the incorrect use of the 10 series of the CPC in Box 37 of C88.

  48. HMRC say that the Appellants' claim does not, consequently, satisfy the opening condition of Article 78(3) of the Code. The Appellants seek to invoke an entirely different customs procedure. But (say HMRC) to achieve that different customs procedure the export declaration has to be invalidated in pursuance of Article 66(2) of the Code. Invalidation of the export declaration is impossible in the present circumstances because the goods have already left the customs territory of the Community (see Article 251 IR).

  49. Turning to the power, given by Article 78(3) of the Code to take the measures necessary to regularise the situation taking account of the new information available, HMRC say that there can be no regularisation. The presentation of a re-exportation declaration will be ineffective where, as here, the goods have already left the customs territory of the Community; this is because there can have been no prior notification as required by Article 182(3).

  50. Moreover, say HMRC, Article 78(3) cannot be invoked to remove a customs debt that has already been imposed by the combined effect of Article 865 IR and Article 203 of the Code.

    51. The case for the Appellants on Article 78(3)
  51. The Appellants stressed that their only error had been to use the wrong CPC serial number. Save that, they had done exactly what Public Notice 221 said when it told the reader that "Exporting outside the Community" will clear the debt. The application to amend, it was argued, came well within the scope of Article 78 and the errors should be regularise with retrospective effect.

    52. Discussion on Article 78
  52. I think HMRC are wrong in their contention that an error of the present nature can only be corrected (if at all) by the invalidation provisions of Article 66 of the Code. That article is not, in my view, aimed at the present situation. If applicable, it leads to the invalidation of the original export declaration, but it makes no provision for the substitution of the new re-export declaration. If invoked in time it would apply to enable invalidation of the export declaration on the grounds that the declaration had been accepted as a declaration in which the declarant had declared in error for the customs procedure of exportation. In the present circumstances, however, the goods (the compensating products in the form of the generator sets) have been released; Article 66(2) of the Code and Article 251 IR would therefore prevent invalidation. But that is not what we are here concerned with.

  53. Article 78 of the Code, in contrast to Article 66, has regularisation as its aim. Its purpose is to correct errors. It envisages, as the Court in Case C-468/03, Overland Footware Ltd (20 October 2005) observed, an element of reformulation of the original declaration so as to correct the impact of both technical errors and omissions and errors of interpretation of the applicable law. In that case Article 78 was used to correct a declaration in order to show separately the buying commission from the price actually paid or payable (where the declaration had erroneously included a "buying in" commission in the customs value) even after the goods had been released. Because verification of the facts and revision might take place after release of the goods, the customs authority's action called for the examination of all documentary evidence (see paragraph 50 of the judgment). In the present case the information of each re-export is available, as are the Appellants' records in support of their IPR returns. Moreover, both the Appellants and HMRC recognised that the mistakes were made.

  54. HMRC are in my view adopting a wrong and too restrictive construction of the opening words of Article 78(3). Their construction requires us to read the words "the provisions governing the customs procedure concerned have been applied on the basis of incorrect or incomplete information" as referring to the procedure of export. But here the goods, the Appellants' generator sets that comprised the compensating products, were in the IPR procedure. That was the "customs procedure concerned" which was mistakenly misapplied by use of the CPC "10" series entry in Box 37 when, but for the incorrect information given to CHIEF, the generator sets should have figured as re-exportations. It follows in my opinion that the conditions for application of Article 78(3) of the Code are satisfied in the present case.

  55. Article 78(3) of the Code directs the customs authorities to take the measures necessary to regularise the situation. That obligation is, I think, equally applicable where the customs declaration in question declared the wrong amounts or where, as here, the wrong CPC serial number has been entered in Box 37. The Court, in paragraph 63 of Overland Footware Ltd, observed that Article 78(3) made no "distinction between errors or omissions that are capable of correction and others which are not". The Advocate General (Maduro) in paragraph 36 of his Opinion had said that the notion of error is not limited to mere calculation or copying errors and includes any kind of error that vitiates the decision in question. Referring to the expression "incorrect or incomplete information" in Article 78(3) of the Code, the Court expressed the view that those words covered "both technical errors or omissions and errors of interpretation of the applicable law".

  56. I cannot see that there was any error of interpretation of the applicable law here. All that has happened has been the consistent entry of the CPC series number "10" in Box 37 in circumstances where the Appellants have actually been re-exporting the goods in question.

  57. The regularisation of the situation can in my view make good the absence of prior notification. There was only one procedure being invoked and that was re-exportation; and the provision of the correct information, by entering the CPC series number "31" in Box 37, would itself have operated as prior notification for purposes of Article 182(3) of the Code.

    58. Conclusion on Article 78
  58. It follows that Article 78 of the Code is fully engaged in the present circumstances. I am satisfied that the obligation imposed on the customs authority by the concluding words of Article 78(3), i.e. "to take the measures necessary to regularise the situation", does authorise HMRC to treat prior notification under Article 182 as having taken place. In my view there is a necessary implication that the "regularisation" does require that assumption. Otherwise the regularisation is manifestly incomplete and the outcome is unjust. The customs authority would be left with their windfall gain which would not have been there had the declaration in relation to the "customs procedure concerned" (concerning IPR and the correct use of re-exportation) been completed in a correct and regular manner.

    59. Remission of the customs debt: Whether "obvious negligence may be attributed to" the Appellants?
    The legislative framework
  59. Assuming that the Appellants' errors have incurred a customs debt, the question arises as to whether the debt can be remitted under Article 239 of the Code. This provision provides:

    60. "1. Input duties or export duties may be repaid or remitted in situations other than those referred to in Article 236, 237 and 238 –
    - to be determined in accordance that the procedure of the committee;
    - resulting from circumstances in which no deception or obvious negligence may be attributed to the person concerned. The situations in which this provision may be applied and procedures to be followed to that end shall be defined in accordance with the committee procedure. Repayment or remission is made subject to special conditions".
    2. Duties shall be repaid or remitted for the reasons set out in paragraph 1 upon submission of an application to the appropriate customs office within twelve months from the date on which the amount of the duties was communicated to the debtor".

    Article 899(1) IR provides that where the decision-making customs authority establishes that an application for repayment or remission under Article 239(2) of the Code is based on grounds corresponding to circumstances described in Articles 900-903 IR, and that these do not result in deception or obvious negligence on the part of the person concerned, the authority shall repay or remit the amount of duties concerned. Further, Article 899(2) provides that (save in cases to which Article 905 IR applies) the decision-making customs authority shall decide to grant repayment or remission of the duties where there is a "special situation" resulting from circumstances in which no deception or obvious negligence may be attributed to the person concerned. "Special situation" has been interpreted to mean "factors liable to place the applicant in an exceptional situation compared with other operators engaged in the same business" (Case C-86/97 Woltman [1999] ECR 1-1041).

    HMRC's position
  60. It is not in dispute that the present circumstances qualify as a "special situation". The issue on the application of Article 239 of the Code arises solely from the power to grant remission or repayment being subject to the condition that there has been "no deception or obvious negligence" as regards the circumstances which have led to the situation in question. The customs authorities have refused remission. They say that "the situation" has resulted from obvious negligence attributable to the Appellants. The charge of obvious negligence attributable to the Appellants is based on three factors. First, the Appellants were experienced users of the IPR regime. Second, the errors (i.e. the mistaken use of the CPC 10 series in Box 37 when compiling the export C88s) did not come to light because of the Appellants' own efforts but through the efforts of HMRC. Third, the Appellants had repeated the errors over the whole period covered by the present post-clearance demands.

    61. The Directorate General's opinion
  61. In January 2002 HMRC wrote to the Directorate General in Brussels drawing attention to a possible application of Article 865 IR having the effect of establishing a customs debt under Article 203 of the Code. The Directorate General wrote back stating that that was how Article 865 IR should be applied.

    62. The "Weir Pumps" reference
  62. The position taken by HMRC in the present case reflects a decision of the Repayment and Remission Committee ("the R&R Committee) of the European Commission relating to the circumstances of a trader called Weir Pumps. Weir Pumps had been presented by customs (with the assistance of Weir Pumps' accountants) on paper to the Committee as a "test case" on 18 July 2003. The decision was produced on 13 January 2005. HMRC published the decision in the Annex to JCCC Paper 05/08. The Committee proceeded on the basis that there was a customs debt; (it is not clear whether it was part of the Committee's function to decide the matter). The error referred to had been the export of electric pumps "using the standard procedure" in circumstances where upon import the pumps had been placed under IPR procedure for repair. The Committee, having considered the written material provided to it, decided that Weir Pumps "must be deemed obviously negligent" on grounds that it had had several years experience of IPR and that the errors had been detected by HMRC rather than brought to light by Weir Pumps' efforts.

    63. The Söhl & Söhlke ruling
  63. It is probable (though not specifically acknowledged in the Committee's decision in Weir Pumps) that the Committee took account of the ECJ decision in Firma Söhl & Söhlke (Case C-48/98). Relevant to the present appeal is Ruling 2(c) of the Court which reads as follows:

    64. "(c) In order to determine whether there is obvious negligence within the meaning of the second indent of Article 239(1) … account must be taken in particular of the complexity of the provisions non-compliance with which has resulted in the customs debt being incurred and the professional experience of, and the care taken by, the trader. It is for the national court to determine, on the basis of those criteria, whether there is obvious negligence on the part of the trader."
  64. The facts of Söhl & Söhlke were distinctly different from the present circumstances. Söhl & Söhlke, an importer of goods under outward processing arrangements, had started in mid-1993 to miss the 20-day time limit for customs clearance. Söhl & Söhlke received a warning from the customs authorities at the start of 1994 (when the Code came into operation) and was informed that a customs debt had been incurred under Article 204(1)(a) of the Code. For the next 11 months Söhl & Söhlke regularly failed to meet the prescribed time limits for assigning the goods a customs approved treatment or use. Söhl & Söhlke ignored the letter from the customs authorities asking for an explanation. Instead, Söhl & Söhlke made several requests for extensions of the time limits based on reasons of "backlog of work", "computerisation difficulties" and "staff shortages". All those requests were refused and the customs authorities issued 125 notices of assessment under Article 204(1). Söhl & Söhlke appealed to the German Tax Court and appear to have paid the assessed tax. Among other issues before the Tax Court was whether the tax was repayable under Article 239(1) of the Code.

  65. Dealing with this point, the ECJ (in paragraphs 51 and 52) stated that the provisions of Article 239(1) of the Code were to be interpreted strictly such that the number of cases of repayment or remission should remain limited. The Court explained that the repayment and remission provisions should be applied in a manner compatible with the protection of legitimate expectations. This approach required the national court, when confronted with the issue of whether obvious negligence should be attributed to a particular trader, to have regard to the nature of the error: and it brought into the reckoning the three criteria, namely the complexity of the relevant provisions, the professional experience of, and the care taken by, the trader: see paragraphs 56-58 of the judgment. Before applying those to the present case I make the point that the situation in Söhl & Söhlke was one of knowing and persistent non-compliance on the part of the trader.

    66. Application of the Söhl & Söhlke ruling
  66. The Court in paragraph 56 explained that the enquiry as to whether or there had been obvious negligence in circumstances of "the precise nature of the error" called for account to be taken "in particular of the complexity of the provisions non-compliance with which has resulted in the customs debt being incurred, and the professional experience of, and care taken by, the trader". The next three paragraphs explain this:

    67. "57. As regards the professional experience of the trader, it is necessary to examine whether or not he is a trader whose business activities consist mainly in import and export transactions and whether he has already gain some experience in the conduct of such transactions.
  67. As regards the care taken by the trader, it must be noted that, where doubts exists as to the exact application of the provisions non-compliance with which may result in a customs debt being incurred, the onus is on the trader to make enquiries and seek all possible clarification to ensure that he does not infringe those provisions.

  68. It is for the national court to determine, on the basis of those criteria, whether there is obvious negligence on the part of the trader."

  69. The precise nature of the error is not in dispute. The Appellants' C88s contained the wrong CPC number in Box 37. The errors were occasioned by the failure of the Appellants to notify their freight forwarders, and the freight forwarders of "ex-works buyers" who had taken ownership of the goods prior to export, that the generator sets contained goods under suspension (IPR), i.e. that they were compensating products.

  70. The "complexity of the provisions", the "professional experience of the trader" and the "care taken" are to be examined in the light of that error.

  71. The "provisions" are the Code and the Implementing Regulations. They are in my view highly complex. They were not written to be read by operatives in the export business. For a lawyer practising in the UK to grasp their significance calls (if my own comprehension is anything to go by) for study and application over a long period. Even then the meaning of a delphic expression such as "having the effect of wrongly conferring on them the customs status of Community goods" in Article 865 IR will be hard to determine with any confidence. Complex and difficult legislation, particularly in a "taxing" statute, places a heavy burden of care and management on the customs authorities of the Member States. If the customs authorities are to interpret and, as here, use an implementing provision to widen the scope of its related charging provision it is incumbent on them to make the position clear from the outset so that traders know with certainty whether they will or will not be held accountable for the consequent amount of import duties. For this purpose the customs authorities should publish guidance that fully informs the trader and his operatives what is expected of them and what the implications will be of failure to comply. The customs authorities should sponsor education of operatives in the export and import business. The guidance should, in a properly ordered system, be underpinned by a compliance penalty regime, such as the default surcharge regime used to coerce compliance with VAT obligations. I do recognise that where inadvertence itself triggers the charge, it may be too late to penalise the trader for his own inadvertence. But nonetheless the imposition of one compliance penalty at an early stage in relation to one incorrect export C88 should coerce the trader into compliance without allowing the build-up of a huge customs debt relating to two and a half years of erroneous entries in Box 37.

  72. Who are the traders whose professional expertise falls to be examined? Based on the evidence I was given by witnesses in the employment of the Appellants and by witnesses employed by the freight forwarders at the port of export, these are all operatives in the exporting process. Typically they will have received no vocational training. They will all have learned on the job. Their training will have come from their supervisors. Most of them will have had long experience in the conduct of export transactions. Where they work for freight forwarders and their principal says "This is an export of non-Community goods", their reaction will be to follow the drill and enter a CPC number in the "31" series in Box 37 of C88. They do not "know" the law in the sense of comprehending the Code and the Implementing Regulations. Few of them will have given the Public Notice 221 more than an occasional glance. What is common to all the freight forwarding operatives is that they know the drill and know the significance of the CP Code.

  73. The individuals working for the exporter likewise will have learnt the exporting processes from their own experience. Joanne McLean and Raymond McMorran (who gave evidence) have responsibility for ensuring submission of current IPR returns to HMRC.

  74. Their standards of compliance and those of the in-house staff of the Appellants responsible for customs matters generally are good and are held in high regard by HMRC. The IPR returns gave no cause for concern. There was never a problem with the customs declarations, so far as I am aware, before 2000. Until then FGW was a separate entity using one freight forwarder only. After the re-organisation of the FGW and Caterpillar EPG businesses, the volume of exports increased and several freight forwarders were used. At about that time the clerk with F G Wilson's long-standing freight forwarders, Laura Shearer, took a career break; she had always entered the 31 51 CPC Code in Box 37 (from her knowledge of the client, she said). From then on the in-house staff became more and more distanced from the freight forwarders. The telephone ceased to be the means of communication. E-mail took over. The freight forwarders, who complete the export declarations, do so, as already noted, on the basis of the information given them by their clients. When the goods are to be exported (rather than re-exported) clients did not normally give any specific instructions as to how Box 37 of C88 should be filled in. The freight forwarders will use a number in the 31 series only if specifically instructed to do so by their principals One member of the freight forwarders' staff (Jesse Borghmans) did not recall ever having been told by the Appellants to use the 31 series; other clients had given her instructions to use the 31 series.

  75. The standards of the Appellants' staff were, as noted, high save only that they did not check the instructions given to the freight forwarders and did not read the C88s. This brings me to the question whether the requisite level of care was taken by the trader "the Appellants".

  76. A suspensive relief such as IPR is a privilege conferred on the trader by the terms of the authorisation. Careful compliance is expected of the trader. The IPR system can also be seen as a privilege conferred on each Member State. Where, as here, the system is legally complex, a high standard of care and management is required of the customs authorities of the Member States. While the trader may have neglected to comply with the IPR regime, the question whether there has been obvious negligence on his part will, as I read the guidelines in Söhl & Söhlke, call for a balance being struck between the standards actually adopted by the trader and the standards of care and management of the customs authorities.

  77. I turn now to look at the causes of the errors.

  78. The root cause was a failure on the part of the Appellants to communicate to their freight forwarders that the particular consignment of a generator set contained non-Community goods in the shape of compensating products. The point was made for the Appellants that the heading of Box 37 as "PROCEDURE" is deceptive. Re-exportation is an "approved use" and not a "procedure". I agree. The heading to Box 37 indicates that the customs authorities do not expect the users to know the law. They are expected to follow the drill and use the right CPC. Having said that, there was no evidence that either of the Appellants or the any of the freight forwarders were taken in by the heading to Box 37. They carried out the steps of the drill they had picked up through long experience.

  79. From August 2002 onwards, the Public Notice 221s gave the following warning in paragraph 15.31. So far as is relevant they read:

    80. "Customs debt
    • a customs debt will be incurred
      …
    • through a failure to meet an obligation that is required under IPR e.g failure to submit a suspension return, use of an incorrect CPC …"

    No explanations were given as to why a customs debt might be incurred. The normal user would, I have no doubt, have been confused if the writer of the Public Notice had attempted to explain the present interpretation of Article 865 IR as advanced by HMRC. Nonetheless the careful trader should, I think, be expected to have ensured that the correct CPC entries were being made in Boxes 37 of the CPCs. In the present situation the requirement to use the correct CPC had been pointed out to the Appellants in HMRC's letter of 25 April 2002.

  80. For those reasons I think that there has been an element of neglect on the part of the Appellants and that neglect has been a cause of the errors.

  81. It is relevant to record in this connection the evidence of Colin Davies (of HMRC's policy team). He was aware of 484 cases where businesses had entered in correct CPCs at re-exportation since 2000. There were at the time 6,000 businesses authorised for IPR in the UK. 30,000 entries to IPR have been made using the simplified authorisation procedure. Better details were not available. Nonetheless, it does appear that there were plenty of compliant compilers of Boxes 37.

  82. But in determining whether the Appellants' neglect is obviously negligent, the Söhl & Söhlke guidelines call for an examination of the underlying causes for the error and here the standards of care and management adopted by the customs authorities must come into the reckoning.

  83. The Appellants were in fact unaware that anything was wrong with their C88s until February 2005 following publication of the decision of the R&R Committee in the Weir Pumps reference. The evidence showed that there had been no training courses covering the obligations in the course of re-exportation to use the correct CPC. Nor was there any feedback on the adequacy of compliance with export declaration requirements and warnings as to their inadequacy. A reason why the customs authorities of the UK had not raised queries or interrogated export entries such as those of the Appellants on their export declarations was because the MSS used by HMRC did not and could not give the requisite data, at least during the time when Jennifer Addis of the Belfast customs had responsibility for the Appellants' affairs. "It just was not possible", she said. At the same time it was possible to verify the export entries in Section C of the Appellants' monthly C&E 812 Duty Suspension Returns.

  84. Raymond McMorran, a member of the indirect tax team of the Appellants, explained that he had not seen any defective export declarations because there had been no requirement on the freight forwarders to return them for filing. He had not sought to see them because he had not perceived the possibility of incorrect entries and it had certainly not occurred to him that there could be an issue in that connection; consequently he had taken no steps to check. Joanne MacLean, to whom the authorisations have been addressed, knew that the final authorisation of 9 October 2003 specified the correct CPC. She admitted she could have found that out earlier. Which she must have, because she had been meticulously entering the correct CPC for re-exportations on the C&E 812 returns (at least on those exhibited to Jennifer Addis's witness statement).

  85. I return to the obligation on the trader "to make enquiries". Cathryn Turner took up her role as UK indirect taxation manager of Caterpillar EPG in July 2004. She accepted that she knew that the correct CPC at re-exportation was necessary; she assumed that others were ensuring its correct use. She was not, she said, aware that pre-notification was a requirement. Of course when the provisions were drawn to her attention following the meeting of January 2005 when HMRC started to explore the possibility of assessing for the customs debt, she could see what HMRC were concerned with. Nonetheless, should she have made enquiries and obtained clarification to ensure that there was no infringement of the IPR rules and the re-exportation provisions? In my opinion there is no sufficient reason why she should. News of the Weir Pumps ruling of the R&R committee was not published until it appeared in full as an Annex to JCCC Paper 05/08 issued in February 2005. There may have been an earlier awareness within the trade associations of the possibility of customs debts being claimed following the outcome of the ruling; but the competent operative in the field cannot be expected to have taken account of those.

  86. HMRC in Belfast appeared to be totally satisfied with the information recorded in C&E Forms 812 and, as noted, that Form covered all necessary aspects of "Duty Suspension". Custom had done nothing specific to put anyone on notice that the CPCs entered in Box 37 at the time of re-exportation might be erroneous. They had no means of verifying the entries, at least until the MSS had been upgraded after 2002 and was able to feed information into CHIEF. The only live warning was that in paragraph 15.31 of the January 2003 version of Notice 221 about use of an incorrect CPC being an example of failing to meet an obligation that is a requirement under IPR. That message had, as already noted, been included in a letter from Belfast HMRC of 25 April 2002 to the Appellants, no doubt prompted by the ruling of the Directorate General of 11 February 2002; but there was no suggestion that it might apply to the circumstances of the Appellants. Nothing, throughout the history of the Appellants' dealings with HMRC in relation to the IPR regime, could possibly have constituted a warning of their shortcomings or as a "letter before action".

  87. There have, as I see it, been two systemic failures in the present circumstances. HMRC have failed in their duty of control and management of the IPR regime in not educating and warning traders of the implications of using the wrong CPC number when filling in Box 37. They can scarcely be blamed because the construction now being advanced (assuming always that it is right) is anything but obvious and, in any event, Parliament never invested HMRC with coercive powers to impose progressive and proportionate penalties for compliance failures of this sort. The Appellants have failed over a long period of time. They too can scarcely be blamed because they have been making correct re-export returns in Section C of their C&E 812 Forms and, notwithstanding a long and good relationship with HMRC, they have never been told (at least until January 2005) that anything was wrong about their purported re-exportations. Both sides' failures have been contributory causes. The failings of the Appellants must be judged, in determining whether they amount to "obvious negligence", in the light of the indifference on the part of HMRC to those failings until January 2005.

  88. In these circumstances, and having regard to all the features referred to above, I think that the Appellants took care to the standard envisaged by the Court in Sohl & Sohlke. Looking at the matter in the round and in the light of extensive evidence and argument, I am therefore satisfied that there has not been obvious negligence on the Appellants' part.

    89. Article 204 of the Code
  89. The review decision of 31 January 2006 states that the Respondents do not consider that Article 204 applies. I have not, therefore, addressed the point.

    90. The next step
  90. As I understand the position under Article 905 IR, even where the customs authorities (backed by this decision) consider that remission is justified, they cannot remit the debt where the amount in question is more than EUR 500,000. In those circumstances although our customs authorities may consider that a special situation exist and no obvious negligence can be attributed to the trader, the customs authorities are obliged to transmit the case to the Commission (see Article 905(1) IR). The obligation to transmit a case to the Commission does not apply where the Commission has already adopted the decision on a case involving comparable issues of fact and law (see Article 905(2)). Weir Pumps is such a decision but the Committee's summary of the facts is so sketchy that it is not possible to conclude with any confidence whether that case is comparable to the present one. There appears, nonetheless, to be a division of opinion within the Community. In all the circumstances, I think it will be more pragmatic to refer the "obvious negligence" question to the Europe Court of Justice. There will, as already mentioned, be a reference on the question of whether a customs debt has arisen by virtue of Article 863 IR. A reference should be made in relation to the Article 78(3) of the Code point. It would, I think, be pragmatic to include in the reference questions matters relating to the "obvious negligence" issue.

  91. This matter will need to be dealt with at a Directions hearing to determine the manner of the reference to the ECJ. The present decision is too lengthy and too discursive to form the basis of the reference. A summary will be required, setting out the facts and matters relied on and, as appropriate, the conclusions. If the parties can agree such a summary, so much the better.

    92. SIR STEPHEN OLIVER QC
    CHAIRMAN
    RELEASED: 23 January 2008

    LON 2006/7029

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