United Kingdom VAT & Duties Tribunals (Customs) Decisions

 


C00254

VALUE ADDED TAX - importers of footwear - approval to use Simplified Import Vat Accounting (SIVA) withdrawn by Customs - was there "reasonable cause" for this decision - compliance criteria - exercise of discretion by Customs - appeal dismissed

MANCHESTER TRIBUNAL CENTRE

JBI LIMITED Appellant

- and -

THE COMMISSIONERS OF HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: Elsie Gilliland (Chairman)

Marilyn Crompton (Member)

Sitting in public in Manchester on 11 January 2008

Mark Butterworth, financial accountant, for the Appellant

Nicholas Brown, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

1. The appeal heard by the Appellant was that of JBI Limited ( the Appellant) against a decision of Customs to withdraw from the Appellant approval to operate the Simplified Import VAT Accounting (SIVA). Subsequent to a warning letter on 17 November 2006 the Appellant was informed of the withdrawal by letter of 24 April 2007 and this decision was upheld on review as notified to the Appellant by Customs in their letter of 6 July 2007. The Appellant which operates from premises at Bacup in Lancashire, is an importer of footwear mainly from China. It was represented at the hearing by its financial accountant, Mark Butterworth.
2. Nicholas Brown, counsel for the Respondents, with the agreement of Mr. Butterworth, gave a brief outline of the operation of SIVA. Within this scheme a trader is granted power to defer payment of import tax giving nil security. An important point is that it eliminates the need for deferment security for import VAT only and not for customs and excise duties. There are two levels of requirements within the system namely Deferment Guarantee Limit (DGL) which is the amount of security required to cover all deferment of customs and excise duties and Deferment Account Limit (DAL) which is the overall credit limit sufficient to cover all deferred charges . This latter amount must meet both DGL and import VAT so it will always be at a higher level than DGL. SIVA approval may be withdrawn if there is a failure to comply with the deferment requirements. In the case before us the Respondents considered that the Appellant had a poor Deferment Account compliance.
3. The framework of the legal position is in the European Community Customs Code, Articles 224 - 228; in domestic legislation in the Customs and Excise Management Act 1979 (section 45); and in various statutory instruments incorporating regulations including the Customs Duties (Deferred Payments) Regulations 1976 (SI 1976/1223).Relevant provisions are in the Value Added Tax (Amendment) ( No.5) Regulations 2003 which came into force on 1 October 2003 and introduced the SIVA system by insertion of a new regulation 121A into the VAT Regulations 1995 It is provided that "if there is no risk to the payment" of deferred import VAT Customs may, at their discretion, waive the need for security for the full payment of import VAT.
4. A Notice of Appeal completed by the Appellant was dated 3 August 2007 and in it the grounds of appeal were stated to be:

" We have always tried to maintain a guarantee limit at an acceptable limit for our trade. Unfortunately this limit has sometimes been exceeded, but on all [underlined] occasions the payments have been made, and on all [underlined] occasions our Bank have agreed to increase the guarantee limit, as requested."

5. In putting the Appellant's case Mr. Butterworth stated that he was not disputing the facts but rather the reasons given by the Respondents for their decision. He contended that the record of the Appellant was not poor. He described an increase in the Appellant's profitability requiring he acknowledged an increase in the Bank bond. The level of trade he stated varied seasonally and year on year. This variability resulted in changing levels of limits within the SIVA scheme which were hard to monitor.
6. In the review letter of 6 July 2007 the review officer Hazel Watts set out the DGL and DAL figures on which the decision was taken. Mrs. Watts attended the hearing and gave evidence. Paragraph 16 of her letter states:

" Your company's SIVA approval was withdrawn due to the exceeding of the Deferment Guarantee Limit of £150,000 and Deferment Account Limit (DAL) of £361,040 (DGL/DAL) on more than 2 occasions in the last 12 months (from the date of the withdrawal letter)."

DGL £150k DAL £361,040

Month DGL Exceeded by DAL Exceeded by

April '06 £49,463.54 £74,847.00

May '06 £31,698.84 £53,267.13

August '06 £34,529.19 £24,555.02

Levels Raised DGL £200k DAL £440k

September '06 £2106.53 _____

March '07 £5,566.20 _____

7. In correspondence and in his submissions Mr. Butterworth said that at the time of exceeding the limit in April 2006 he had sought an increased Bank guarantee and this in the sum of £200,000.00 was arranged as of 24 May 2006. The ensuing difficulties were, however, first, that the limits had not been increased by Customs as their records had not been updated. He had therefore completed the SIVA 2 schedule again on 8 September 2006. However the limits for May, August and also September 2006 were exceeded. Secondly, for the months September 2006 and March 2007 by way of explanation he referred to the letter from Customs dated 17 November 2006. Although the duty limit had been exceeded by £2106.53 for September 2006, the overall DAL had not been exceeded. The Appellant took the decision not to apply for further increases in the levels as it considered that there were adequate limits in place.
8. Mr. Butterworth submitted that the action of Customs in removing the SIVA facility for at least one year was unfair as the Appellant had taken proper steps in May 2006 to prevent itself going beyond the limit and the circumstances relating to the SIVA 2 schedule dated 24 May 2006 were not its fault. Equally the Appellant was in the hands of its bankers as to how quickly they contacted Customs in connection with increases in guarantees. Mr. Butterworth emphasised the adverse financial effect on the Appellant through increased Bank charges. He appeared to place some blame for the Appellant's difficulties on the Respondents. First he stated specifically that the Appellant had not known until August 2006 ( from a letter from Customs dated 11 August 2006) that the SIVA 2 schedule which he said had been completed and sent to Customs in May 2006 (a copy produced by him to confirm this was dated 24 May 2006) had not been processed as it was claimed by the Respondents that it had never been received by them. Secondly and generally he contended that there were problems in operating the scheme as up-to-date information was not always available from Customs.
9. The issue before the tribunal is whether in the instant case Customs have properly exercised the power to revoke the SIVA approval. What is provided in the Excise Duties (Deferred Payments) Regulations 1992 (SI 1992/3152) Part II Article 4 (5) is that Customs may:

"…for reasonable cause, at any time vary or revoke any approval granted under this Regulation."

It is clear to us that Customs are exercising a discretion when making a decision of this nature. Accordingly this is viewed as an ancillary matter and under the provisions of section 16(4) of the Finance Act 1994 as a tribunal we must be satisfied as to whether the decision of Customs is one which could not reasonably have been arrived at, a decision which no reasonable body of [Commissioners] could take. We apply Wednesbury principles ( Associated Provincial Picture Houses Ltd. v Wednesbury Corpn. [1948] 1KB 223) in considering whether the Respondents in so exercising their discretion have taken into account all matters they are bound to consider, have excluded irrelevant ones and have directed themselves properly in law.

10. SIVA is not in reality a simplified VAT accounting scheme. It merely takes away the need for approved importers to hold security for the deferment of import VAT. The Appellant was made aware at the time of approval that Customs reserved the right to withdraw or suspend approval under SIVA without prior notice if there were a failure to comply with the criteria. There are various conditions attached and eligibility is assessed against matters such as the VAT payment history of a trader. There are also various procedures to be followed.
11. A case involving an attempt by Customs to withdraw SIVA approval was produced to us. This was the case before a VAT tribunal of Martin Yaffe International Ltd. V HMRC [2005] UKVAT (Customs) C00197(14 July 2005). Mr. Brown referred to paragraph 16 of the decision . The Respondents' counsel in that case had contended that as SIVA represented a concession to the trader it was appropriate that strict compliance with the conditions of approval should be demanded and that Customs should be cautious. The view of the tribunal then was :

"16. …Certainly, we accept that strict compliance is to be expected, and that the Respondents are right to be cautious. Where we differ…is in our view that a default is not necessarily indicative of a risk to the revenue, even if there is no reasonable excuse for it. We have come to the conclusion that, as the test laid down in the statutory provision is "risk to the revenue", that must be the focus of officers making decisions of this kind."

In that case the appeal was allowed and a further review was directed.

12. Accordingly so far as the grant of approval under SIVA is concerned " risk to payment" is the relevant consideration; so far as withdrawal of a given approval is the issue "reasonable cause" is to be established and in those circumstances " risk to the revenue " is a factor to be taken into account. Whilst the exceeding of the deferment limits did not of itself lead to a default in payment the approach of Customs would appear to be that it did indicate an inadequate handling by the Appellant of financial matters and that in itself constituted a serious risk. When asked by the tribunal if the Appellant was a "diligent trader" the answer of Mrs. Watts was "No." In testing reasonableness she said that she did look at what would constitute a diligent trader. She told the tribunal that she herself had not encountered traders with problems in the predicting of guarantees because of seasonal fluctuations in their business. It was her view that the SIVA regime could accommodate seasonal variations if the limits were set correctly. She had given details in correspondence and did so also at the hearing of online and telephone contacts by which the Appellant could have updates on its position indeed could get information on a daily basis. Mr. Butterworth had referred to difficulties in considering deferment limits when there had been late transactions at the end of a month and statements from Customs came one week later.
13. When determining what constitutes "reasonable cause" in our opinion "risk to the revenue" can be viewed in its widest sense and does not necessarily require there to have been a payment missed. To our mind it is appropriate that a business should be required to comply strictly not only with the making of payments but also the ascertaining and sustaining of the proper deferment limits for its trading pattern. Mr. Butterworth said that the Appellant's record had been tarnished by the loss of the SIVA 2 schedule and that it had "done its best". We are unable to give any explanation for that loss as no evidence was produced to us, for instance, evidence of posting. However we are satisfied that there were further problems in the Appellant's operation of the SIVA scheme.
14. We are satisfied that there was no unfortunate one-off incident affecting the Appellant . From the evidence before us we see an inability on the part of the Appellant to organise the financial operation of its business to ensure that it was at all times aware of its trading position and could comply with the strict requirements of SIVA. We find that Customs had "reasonable cause" for its decision to withdraw approval.
15. The appeal is dismissed.
16. Customs did not seek costs and we give no direction as to costs.

MAN/07/7037

Elsie Gilliland

CHAIRMAN

Release date: 18 March 2008

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