United Kingdom VAT & Duties Tribunals (Excise) Decisions

EO00914

EXCISE DUTY — haulier's guarantee for movement of duty unpaid goods — cancellation — reasonableness — appeal allowed

MANCHESTER TRIBUNAL CENTRE

CHIP LOGISTICS LTD Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Richard Barlow (Chairman)

Marjorie Kostick

Sitting in public in public on 29 and 30 June 2005

Mr Derek Payne of Grove Business Services for the appellant.

Mr Nigel Poole of counsel instructed by the acting solicitor for HM Revenue and

Customs for the respondents.

© CROWN COPYRIGHT 2005.


 


DECISION
1. This appeal is against a review decision dated 10 September 2004 by which the commissioners confirmed a decision they had made on 9 June 2004 to "lapse" the appellant's guarantee under section 157 (2)(c) of the Customs and Excise Management Act 1979 (CEMA) with effect from 9 July 2004 (which was extended to 25 July 2004 by a letter dated 29 June 2004). That section actually refers to a guarantee being cancelled but it is clear that that is what the decision letter meant. The commissioners had agreed to review the decision though they regarded the request to them to do so as being out of time. In fact a letter dated 20 July 2004 from the appellant's then representative requested a review which would have been in time but was treated as a request for a local review rather than a statutory review. The appeal therefore lies to the tribunal under section 16(1)(b) of the Finance Act 1994 (FA 1994) if customs were right to conclude that the letter of 20 July was not a request for a review under the FA 1994, or otherwise the appeal lies under section 16(1)(a) on the deemed confirmation under section 15(2). We need not decide which provision applies.
2. The appellant was represented by Mr Derek J Payne of Grove Business Services and the respondents were represented by Mr Nigel Poole of counsel.
3. The appeal relates to a decision which does not fall within section 14(1)(a) to (c) of FA 1994 and so will have to fall within section 14(1)(d) if we are to have jurisdiction. That paragraph refers to matters referred to in Schedule 5 of the Act and paragraph 2(1)(s) of Schedule 5 covers "any decision under section 157 [of CEMA] … as to the cancellation of any bond". There is a mis-match between the provisions because section 157 refers to the cancellation of "any bond, guarantee or other security" whereas paragraph 2(1)(s) only refers to cancellation of any bond. The reason appears to be that the words "guarantee or other security" in section 157 of CEMA were added by the Finance Act 2000 and it appears that the draftsman overlooked the need to make a consequential amendment to FA 1994. The guarantee in this case was not given by bond. Mr Poole took no point on this and we hold, so far as it is necessary to do so, that the "missed consequentials" principle of statutory interpretation applies (as to which see Bennion on Statutory Interpretation (4^th ed. 2002 Butterworths London) at page 247). Accordingly we hold that paragraph 2(1)(s) is to be interpreted as if the words "guarantee or other security" were included and we have jurisdiction.
4. As the review decision concerns an ancillary matter our powers on appeal are limited, by section 16(4) of FA 1994, to deciding whether the decision under appeal or any decision on the review of that decision was one or were ones that the commissioners or person making the decision could not reasonably have arrived at. If we hold that any such decision was unreasonable we then have powers limited to directing that the decision shall cease to have effect and or to require a further review in which case we can direct that it be conducted in accordance with further directions by the tribunal or, where the decision has already been acted on or taken effect and cannot be remedied by further review; to declare it unreasonable and give directions to avoid a repetition.
5. It is now well established by authority from the higher courts that the tribunal can make findings of fact and is not limited, when reviewing the reasonableness of the decision, either to the facts as known to the decision maker or as perceived by him or her and that its reasonableness is to be judged in light of the facts as we find them to be. Mr Poole agreed that this is the case.
6. The appellant is a haulage contractor and the guarantee, given by HSBC Bank plc, covered customs duties, excise duties, charges, levies and other sums to which goods might become liable and for payment of such charges if the appellant had become liable for payment of them. The appellant needed the guarantee so that it could transport excise goods on which duty had not been paid; typically from an excise warehouse to a destination abroad. The reason the appellant needed the guarantee was that regulation 10 of the Excise Goods (Holding, Movement, Warehousing and REDS) Regulations 1992 (the REDS regulations) requires that a movement of goods under duty suspension must be covered by an approved guarantee or bond. It is not a requirement that the haulier should provide the guarantee but one must be provided by someone and it is part of the appellant's service to its customers to provide it.
7. The basic facts are not in dispute.
8. Two consignments of excise goods consisting of various beers were despatched from Edwards Beers and Minerals Ltd's bonded warehouse in Leighton Buzzard on 23 and 24 March 2004 for delivery to 'EDW' (European Distribution SARL of Wimille) in France. The beer was owned by Hothi Cash and Carry of Stratford London, though whether title passed to European Distribution SARL before the goods were seized is not known. The carriage of the beer was contracted to the appellant which, following its usual practice, sub-contracted it. On this occasion the sub-contact was with Mulberry Distribution Limited which had a yard and warehouse (not an excise warehouse) at Belvedere, Kent.
9. The Belvedere premises were visited by a Mr Lissaman of the commissioners' Excise and International Trade section on an unrelated enquiry on 25 March 2004 and he discovered that the beers from both loads were at the premises but the accompanying administrative documents (AAD's) could not be produced. It is not quite clear from Mr Lissaman's visit report whether the goods had been unloaded from the vehicles in which they had been carried but they were in the premises which were not an excise warehouse.
10. The beer was seized either on 25 March or 26 March and a seizure notice dated the 26 March 2004 gave the reason for seizure as a contravention of regulation 6(5) of the Excise Goods (Accompanying Documents) Regulations 2002, apparently alleging a failure by the authorized warehousekeeper to give notice of an amendment to the consignee or place of delivery. Both Hothi and EDW became aware of the seizure but no-one has required the commissioners to institute condemnation proceedings and only the appellant has attempted to challenge the seizure; though it was told that it could not do so as it was not the owner of the goods.
11. Somewhat surprisingly, no-one from customs was able to tell us whether any further enquiries were made about Mulberry or Hothi and Mr Allan Donnachie, who conducted the review which is the subject of this appeal, said he had not even contacted the Excise and International Trade section to ask if they had any information about that.
12. Mr Lissaman's report refers to Mulberry's explanation about the goods being at its premises rather than having been taken direct to France, which they should have been. Even if customs had been notified of the change the goods should have been taken to bonded premises overnight. The explanation was that, as is common amongst hauliers, they hoped to secure a load for the return journey from France and the goods had been moved into the warehouse (whether still on the trailers or not is not clear) for secure storage while arrangements were made to secure return loads which were usually available in the form of soft drinks. The drivers had taken the AAD's home. Mr Lissaman's report does not suggest any prevarication or attempt to disguise the fact that the beer on the premises was duty unpaid.
13. That explanation would, if true, be an innocent explanation involving incorrect procedures but no intent to evade duty or to divert the goods to the home market. In light of the failure by customs to make even the most basic enquiries we are not prepared to assume that any actual threat to the revenue occurred.
14. We turn now to the disputed evidence.
15. Mr Ronald Osborne, the appellant's managing director, gave evidence and produced documents relating to the carriage of the two loads. He had been requested, by a letter dated 3 February 2003, to give notice to customs before any movement of goods under Chip Logistic's guarantee and before the goods were to be removed from an excise warehouse. He did this voluntarily and later, as is recorded in a letter dated 13 May 2003, he further agreed to notify customs of the details of any prospective customers. In that letter customs also told him that he could use his guarantee when he sub-contracted work.
16. The documents sent to customs about the two loads in question give the correct vehicle numbers for the tractor units, as shown on the copy AAD's obtained from Edwards Beers and Minerals Ltd, though in one case it is not clear that the trailer number is necessarily correctly identified because the copy to customs refers to a trailer number but the AAD refers to the axle number. We are not prepared to assume it was incorrect.
17. Mr Osborne said that he verbally instructed his sub-contractors that they must travel directly to the destination and that they were not to divert from that. It was put to one of the customs witnesses, Mr John Bulmer who had carried out a visit on 13 May 2004 about the goods seized at Belvedere, that Mr Osborne had said then that he had told sub-contractors they must not divert from direct carriage to the specified destination. At first Mr Bulmer agreed he had been told that. Then he said he was not sure, then that he was not 100% sure and eventually, when re-examined, that he had been mistaken. It was also put to him that he had complimented Mr Osborne on his record keeping and he denied that; although he did say he was pleased that there was a file for every consignment. Mr Osborne said he had told Mr Bulmer that he had verbally instructed sub-contractors not to divert from a direct journey to the intended destination.
18. After the issues in this case arose Mr Osborne began to send out written instructions to that effect. He had in the past been taken to task by customs for occasions when goods had been collected from excise warehouses in vehicles or trailers other than those previously notified and he produced a fax he had sent to Edwards Beers and Minerals on 24 February 2004 (i.e. before the problems which have given rise to this appeal) instructing them that they must not send out goods if the wrong vehicles or trailers arrived to collect them. That fax was also copied to customs as we find to be the case. Mr Osborne produced a telephone bill which corroborated to an extent that he had faxed a document to customs on that day and we accepted the truth of his evidence on this point.
19. That Mr Osborne had been reasonably careful to take steps to rectify faults in his system of operating, when they came to his notice, is clear from the fax dated 24 February 2004 and his co-operation with customs when they requested additional information and we find that he had given verbal instructions to his sub-contactors, in general terms at least, about the need for direct carriage.
20. Customs relied upon evidence that on seven earlier occasions vehicles other than those notified on the AAD's had carried goods and on four of those occasions the trailer was also different from that notified. Mr Bulmer was able to confirm that the goods did reach their correct destinations and were not diverted. These errors were raised with Mr Osborne on 9 February 2004 and gave rise to the faxed instructions of 24 February 2004.
21. At the hearing it was agreed by customs, through Mr Poole, that these were relatively minor irregularities and we agree with that.
22. The witnesses for customs were Mr Bulmer, already referred to, Ms Michelle Lee from the Holding and Movement Team in Leeds, Mr John Harper who was at the relevant time in the National Registration Unit responsible for excise approvals and financial security and Mr Allan Donnachie the reviewing officer. A statement from Ms Anne Fitzcharles was read by agreement.
23. Apart from the factual evidence, already described, Mr Bulmer told us that he had recommended the cancellation of the guarantee. Ms Lee considered that recommendation and passed it to Mr Kinghorn (a senior official) who agreed with it and then she forwarded it to Mr Harper who made the actual decision and passed the file to Ms Fitzcharles who did the paperwork leading to the cancellation.
24. All the witnesses who had considered the merits of cancelling the guarantee before it was cancelled were cross examined and their evidence can be summarised by saying that they considered that the earlier errors, referred to above, were relevant and that the fact that the goods were found at Belvedere was sufficient to warrant cancellation because, although there was no evidence that the goods were being diverted to the home market without payment of duty, there had been a sufficient lapse of control as to put the revenue at risk. None of the witnesses could suggest what else Mr Osborne might have done to avoid what happened except perhaps to carry out 'spot checks' on the sub-contractors and to give written instructions not to divert from a direct route. This latter point appeared to be something the witnesses thought should have been done even if verbal instructions to the same effect had been given. None of the witnesses had considered the effect of cancellation on the appellant's business or any question of proportionality.
25. Generally speaking we consider the evidence of these witnesses to be irrelevant except in so far as Mr Bulmer spoke about factual matters, which we have dealt with. The reason for that is that the matter under appeal is the review decision and although these witnesses had played a part in the decision to cancel the guarantee they had not taken part in the review.
26. Mr Poole accepted that the review letter should have set out comprehensively the reasons for upholding the decision. It sets out the history of the request for a review and asserts that it was out of time but that the commissioners would review it voluntarily and then quotes section 157(2) of CEMA. It then sets out the reasons for upholding the decision and follows that with a passage asserting that the goods cannot be restored to Chip Logistics because they were not the owner (which is correct) and because a request for restoration cannot be made more than three months after the seizure the by reason of paragraph 3 of schedule 3 of CEMA (which is incorrect because that provision deals with condemnation proceedings; the commissioners can restore goods at any time if they think it correct to do so). The relevant passage, dealing with the decision to confirm cancellation, reads as follows:

"The circumstances of the seizure of the two consignments of beer at a premises unapproved for the storage of duty suspended goods are considered sufficient grounds for the lapsing of the financial security of Chip Logistics limited.

Chip Logistics Limited were operating as the principal to the movement of these goods that were owned by Hothi Cash and Carry and the transport had been sub-contracted to Mulberry Distribution.

It is the responsibility of the movement principal to ensure that any sub-contractors employed by them are trustworthy and aware of the regulations related to the movement of duty suspended goods.

The commissioners consider that Chip Logistics Limited need to exercise effective control over all goods moving under their financial guarantee during transit, even when this movement is contracted out. The sub-contracting of haulage is a commercial decision for the movement principal and in making that decision, the company and directors should have given due consideration to all potential risks including the possibility of their movement guarantee being lapsed.

Accordingly, the decision to lapse the financial security of Chip Logistics is upheld."

27. The first quoted paragraph therefore states that the decision was based solely on the fact that the goods were found at unapproved premises albeit that the circumstances in which they were found there were also considered relevant.
28. The circumstances in question which are referred to in the letter suggest, without saying so, that there had been a failure on the part of Chip Logistics to ensure that the sub-contractor was trustworthy but in that context we remind ourselves that neither Mr Donnachie nor anyone else involved in the decision have put themselves in a position to say that Mulberry were not trustworthy.
29. Some support for the suggestion that Mulberry were unaware of the regulations might be provided by what happened and we would agree that the principal should take at least reasonable steps to ensure the sub-contractor knows what is required but we have found that Chip Logistics did take steps to instruct Mulberry to travel directly to the destination. Chip Logistics had been using Mulberry as a sub-contractor for some time without becoming aware of any problems and we find that Mr Osborne had reasonable grounds to believe that Mulberry were reliable and honest.
30. The review letter then asserts the need for "effective control" but given that customs accept that hauliers can sub-contract carriage of excise goods and given that it would be impossible for any haulier to make it absolutely certain that no irregularity by a sub-contractor could occur the requirement for effective control by which customs appear to mean 100% control is an impossible requirement. We would point out that, however trustworthy the sub-contractor, he could always inadvertently engage a dishonest or corruptible driver so that 100% control is an impossible aim.
31. Then the review concludes by pointing out that it is a commercial decision for a haulier to use sub-contractors and thereby to risk losing his guarantee if the sub-contractor turns out to be dishonest or careless.
32. Effectively the review appears to be saying that the use of a guarantee when haulage is sub-contracted gives rise to an absolute or strict liability.
33. Mr Poole pointed out that it is often only by chance that Customs detect a diversion of goods to the home market and that therefore the procedures are designed to avoid that happening by laying strict conditions on all parties involved in movement and holding duty free goods. No doubt that is true but it is also the case that punishing the innocent serves no purpose. A person who is wholly innocent of any wrongdoing cannot do more than he has done and it is therefore irrational as well as unfair to punish him. That is the more so if it is not even established that any adverse consequences for the public revenue have in fact occurred.
34. Customs have never suggested that Chip Logistics were deliberately at fault in this case.
35. We bear in mind that carelessness or deliberate disregard for the procedures would count as 'wrongdoing' in this context as it would increase the risk of default by third parties even where the careless person had no intent to evade the duty or to facilitate its evasion. However, in this case we are not satisfied that any carelessness on the part of Chip Logistics has been demonstrated except in respect of the earlier loads when the wrong vehicles collected the goods. But customs did not cancel the guarantee then and because the breaches were minor they would have been wrong to do so. To cancel the guarantee now where no carelessness has been demonstrated is therefore irrational.
36. The consequence of losing the guarantee can be extreme. If the business of Chip Logistics had been exclusively the sub-contracting of haulage the cancellation would have brought the business to a close. It would have become uneconomic for customers to employ Chip Logistics if it sub-contracted the haulage but at the same time the customers had to pay the excise warehousekeeper to use his guarantee. As it happens the appellant operates in other activities so the business did not close but, as it is, it has had to lay off staff and has lost a considerable part of its business.
37. Even if customs had been right to conclude that Chip Logistics had been at fault, which we have found not to be the case, they should have considered whether cancellation of the guarantee was a proportionate response to the fault and there was no evidence to suggest that they had done so.
38. We also bear in mind that the purpose of the guarantee is to cover the loss of revenue, if any, and other penalties which are designed to deter diversion such as seizure of goods and vehicles and prosecution are clearly intended to act as deterrents to wrongdoing. There are cases where cancellation of the guarantee would be appropriate where there has been no loss of revenue but it is not a sanction that should be applied lightly where there is no actual proof that the revenue was ever at risk.
39. For the reasons set out above (principally in paragraphs 32 to 38) we will allow the appeal and hold that the decision of the commissioners to cancel the guarantee and the review decision to uphold that cancellation were unreasonable.
40. As we have already stated, our powers are limited. The question then arises as to which we should exercise in the unusual circumstances of this case. The guarantee has been cancelled and indeed it was cancelled before the time for requesting a review had expired. The cancellation cannot simply be reversed because HSBC Bank was also informed of the cancellation and it has taken effect. We cannot direct the bank to enter into a new guarantee and it may choose not to do so. Nor would a further review by the commissioners remedy the matter for the same reason.
41. It seems that the only one of our powers that is applicable is that contained in paragraph (c) of section 14(4) of FA 1994. We declare the decision that has already been acted upon to have been unreasonable and make a direction to the commissioners, for the purpose of securing that a repetition does not occur, that if Chip Logistics hereafter apply for approval of a new guarantee that approval shall not be withheld on the basis of any of the facts or circumstances referred to in this decision.
42. The appeal is allowed and the respondents are directed to pay the appellant's costs to be assessed by a chairman sitting alone if not agreed between the parties.

RICHARD BARLOW

CHAIRMAN

Release date: 15 September 2005

MAN/04/8089