United Kingdom VAT & Duties Tribunals (Excise) Decisions

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Cite as: [2007] UKVAT(Excise) E1076, [2007] UKVAT(Excise) E01076

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Midland Oil Refinery Ltd v Revenue & Customs [2007] UKVAT(Excise) E01076 (29 November 2007)

E01076

Hydrocarbon Oil Duties Act 1979 - assessment to excise duty - "black gas oil" cleaned - was this "production" as per s.2 (4) of HODA - red dye marking activities - RDCO scheme - effect of waste oil exemption EU Energy Products Directive - appeal dismissed

MANCHESTER TRIBUNAL CENTRE

MIDLAND OIL REFINERY LTD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Elsie Gilliland

Sitting in public in Birmingham on 27 September 2007

Alastair Dey, Customs and International Trade Consultant, for the Appellant

James Puzey, counsel, instructed by the Solicitor and General Counsel for Her Majesty's Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The appeal before the tribunal was that of Midland Oil Refinery Ltd. (the Appellant) against an assessment to excise duty upon the production of unrebated /unmarked oil raised by Customs on 25 August 2005 based on the Appellant's production records in the sum of £123,714 and in respect of the period 5 October 2004 to 2 December 2004.The oil covered by the assessment totalled 232,340 litres and was purchased from 2 suppliers. The assessment was upheld on review on 7 April 2006. It was reconfirmed on 5 March 2007.

The Appellant runs an oil re-processing plant at Shelah Road, Halesowen, Birmingham. It is a registered dealer in controlled oils, a member of the RDCO scheme and thus entitled to deal in rebated oils. As part of the scheme it is obliged to supply to Customs monthly details of its sales of such rebated oils. It has been stated that it is primarily involved in the recovery of used industrial oil and chlorinated solvents through its reconditioning and recovery services. Various processes can be involved including drying, separation, filtering and distillation. The matter relates to one of its activities which was described as the cleaning of collected waste oils using a process including distillation. Subsequent to a visit to the premises on 20 January 2005 it was confirmed to Customs by telephone on 24 January 2005 that the process in question was the taking of dirty waste oil "black gas oil" and cleaning it up to "a better spec" by distillation. The product was said to be duty paid (rebated) gas oil and on distillation the chemical markers in it remained though the red marker which had been removed had been replaced by a red dye. The Appellant emphasised the importance of its oil recovery and recycling procedures towards Government targets.

Several issues arise; first did the process amount to "production" within s2 (4) of the Hydrocarbon Oil Duties Act 1979 (HODA) ; secondly, had the Appellant breached the Hydrocarbon Oil (Marking) Regulations 2002, SI 2002/1471; and thirdly, could the Appellant take the benefit of the derogation provided for in Article 18 and Annex II of Council Directive 2003/96/ EC.

The grounds of appeal of the Appellant set out in its Notice of appeal dated 5 May 2006 were:

" (1) Further evidence that recycled oil does not meet gas oil spec

(2) Not all oil was sold - some used internally as furnace oil

(3) We still believe derogation per Article 18 applies

(4) This recycling activity is not 'production'."

Hydrocarbon oil and the meaning of 'production' within s2 (4) of HODA:

Legislation

HODA is an Act consolidating various enactments relating to the excise duties on hydrocarbon oil, petrol substitutes, power methylated spirits and road fuel gas. Various definitions are set out in s 1 and production is dealt with in s 2(4).

1(2) "Hydrocarbon oil" means petroleum oil, coal tar and oil produced from coal, shale, peat or any other bituminous substance, and all liquid hydrocarbons, but does not include such hydrocarbons or bituminous or asphaltic substances as are -

(a) solid or semi-solid at a temperature of 1degree C, or

(b) gaseous at a temperature of 15 degrees C and under a pressure of 1013.25 millibars."

1(3) "Light oil means hydrocarbon oil -

(a) of which not less than 90 degrees by volume distils at a temperature not exceeding 21 degrees C, or

(b) which gives of an inflammable vapour at a temperature of not less than 2 degrees C when tested in the manner prescribed by the Acts relating to petroleum.

1(4) " Heavy oil" means heavy oil other than light oil.

1(5) "Gas oil" means heavy oil of which not more than 50% by volume distils at a temperature not exceeding 240 degrees C and of which more than 50% by volume distils at a temperature not exceeding 340 degrees C.

2(4) For the purposes of the Customs and Excise Acts 1979, the production of hydrocarbon oil includes -

(a) the obtaining of one description of hydrocarbon oil from another description of hydrocarbon oil; and

(b) the subjecting of hydrocarbon oil to any process of purification, or blending, as well as the obtaining of hydrocarbon oil from other substances or from any natural source

The charging provisions are in s 6 and include that excise duty at a specified rate shall be charged on hydrocarbon oil…

"6(1)(b) produced in the United Kingdom and delivered for home use from a refinery or from other premises used for the production of hydrocarbon oil or from any bonded storage for hydrocarbon oil, not being hydrocarbon oil chargeable with duty under paragraph (a) above,…"

(paragraph (a) does not apply in the instant matter).

The rebating of duty is provided for in s11 and allows a rebate on heavy oil delivered for home use with the rate of rebate varying as between fuel oil, gas oil, ultra low sulphur diesel oil and also heavy oil which is neither fuel oil nor gas oil.

Fuel oil is defined (ss 2) as " heavy oil which contains in solution an amount of asphaltenes of not less than 0.5%, or which contains less than 0.5% but not less than 0.1% of asphaltenes and has a closed flash point not exceeding 150 degrees C…,

Evidence and submissions.

The process as initially described on behalf of the Appellant was a cleaning up of waste oil to a better quality using the plant's Luma wipe film evaporator. Water and solid contaminants were removed but this it had been claimed was a regeneration by re-distillation of used oil and was not a new production within s2(4) of HODA as claimed by Customs. Arthur Rennie a joint director of the Appellant in his evidence referred to the process as re-distillation as the waste oil coming in had already been distilled at the refinery. To charge duty on the product would be to charge duty twice on the same oil. The customers, he stated, would have been aware that they were receiving regenerated products from the prices charged, which were said in October and November 2004 to be mostly 21 ppl, 22 ppl. and 32 ppl., against duty itself of 53.27ppl on unrebated gas oil.

7. However it was stated by Mr.Rennie that it was a mistake on the part of the Appellant that the product had been held out as gas oil. He said that if dutiable it should have been charged at the lesser fuel oil rate of duty. Both were heavy oils but with different boiling points.

The Appellant's representative in his presentation stated that the product had been sold through the RDCO scheme even though it was not in fact gas oil as the general advice of Customs had been "when in doubt" to include a product in the scheme rather than to leave out. Counsel for Customs put it to Mr Rennie in cross-examination that this had been mentioned for the first time at the hearing and had not been referred to in earlier correspondence but the witness insisted that the previous inspectors and the current one had said so.

In response to cross-examination Mr. Rennie confirmed that he did not know from where the 2 suppliers obtained their oil which he said was predominantly a mixture of gas oil, kerosene, solvent and some black heavy oil; as well as the mixture there were also in it water and solid contaminants. When he stated that the oil received was already rebated he admitted that on this they were relying on the suppliers.

In the bundle of papers before the tribunal it appeared that test samples had been taken on 2 February 2005 and a part had been analysed by the Government chemist. This showed a substantial quantity of coumarin (the marker for kerosene); the sulphur content was 2090 parts per million; and there were in the sample solvents, gas oil and lubricating oil. Counsel for Customs submitted that there was no quinizarin in the sample and thus it appeared no rebated fuel.

A test result sheet was submitted by the Appellant to Customs on 15 May 2006 and this was said to show that the product was not of a gas oil specification. Mr. Rennie said that the sample used had been retained by the Appellant from the test sample taken by Customs. On 10 May 2005 the Appellant had provided a specification for a recycled fuel oil for sale to the furnace fuel sector and not fiscally marked. The assessing officer H J Jones who gave evidence to the tribunal had observed that that specification bore the characteristics of a gas oil. Later by letter of 1 February 2007 the Appellant referred to "subsequent research" and "laboratory testing" which had shown that the product was fuel oil.

It was the case of Customs that in fact the product was gas oil and that the Appellant's test showed that the product came within the definition of gas oil. However even with Customs there appears to have been confusion. The attention of the tribunal was drawn to correspondence entered into by F. Manley HMRC Review officer who in a letter dated 4 January 2007 on the face of it accepted that the specification suggested that product was not diesel in quality "but is in fact fuel oil". She did however require more clarification. The Appellant submitted that Customs themselves had acknowledged that this was fuel oil and not gas oil and thus duty if any should be charged at the fuel oil rate of duty.

Counsel for Customs put it to the tribunal that Miss Manley was not writing as part of the review process and her letter could be discounted. This I do not accept. She was a review officer who was writing with apparent authority to the Appellant and on a matter with which she was familiar and had been involved; nor is the fact that Customs had been late in making their initial decision a proper reason for placing less value on her correspondence.

In the circumstances weight has to placed on the technical evidence available from the testing of the samples. The Government chemist did not attend as a witness. In his report he found no rebated fuel which could suggest that there was no rebated fuel in the original sample but this was confused by the markers having been removed. In the test arranged by the Appellant the results indicated boiling points in line with those in the legislation which define gas oil rather than fuel oil. When questioned on this in cross-examination Mr. Rennie was not able to satisfy the tribunal that the product was on balance likely to be fuel oil.

Conclusion

There has been a lack of clarity on the part of the Appellant; first as to what was in fact being received by it; secondly as to the effect and to some extent also as to the nature of the process itself; and thirdly as to the final product obtained. On this last point the Appellant's paperwork and the receipts given record the processed product as gas oil even though they now claim it to be fuel oil. The technical evidence as to percentages and boiling points leads me to the view that this has not been established to be fuel oil. In evidence for the Appellant much use was made of the terms "recycled" and "regenerated"; that nothing was added; and water and contaminants had been taken out of the waste oil though in so far as some oils may have been removed the characteristics of the oil had not been changed. I am not satisfied that the characteristics of the oil were unchanged and that it was a simple cleaning up procedure and in that way the oil was taken back to its original state. To do merely this would not in my opinion require the high temperatures used in the distillation as indicated on the test sheet. The process was more complex in obtaining a clean useable product and was consistent with the production of gas oil. I find that there was a "production" as claimed by Customs. I am also satisfied that the final product fell squarely within the definition of gas oil.

The Appellant told the tribunal that of the total quantity produced a part comprising 70,844 litres was not in fact sold on but was used within the Appellant's own premises as a furnace fuel. It should be noted that in fact furnace fuel also carries a red marker. At that time however the Appellant as was confirmed by Mr. Rennie was not an authorised warehousekeepeer in a duty-suspended regime. Accordingly duty was due and chargeable at the date of production and I so find. The rate is that on gas oil as I have found before.

Prescribed markers and colouring substance - the Hydrocarbon Oil ( Marking) Regulations 2002 ( SI 2002/1773)

Legislation

At an early date (25 January 2005) Customs required the Appellant to cease forthwith the marking procedure which it had been following in respect of the product the subject of the assessment. Part VI of the Regulations contains the prohibitions that:

"14(1) No oil may be marked except in the circumstances prescribed by these Regulations.

14(2) No marker may be removed from any oil.

14(3) No substance calculated to impede the identification of any marker may be added to any oil."

Evidence and submissions.

In order to be eligible for rebate heavy oil must contain certain markers. In his evidence Mr. Rennie confirmed that rebated gas oil will have a solvent red marker and a chemical marker quinizarin. As to what happened to these in the processing he confirmed that the solvent red marker stayed in the heavy residue and the chemical quinizarin in the product. He acknowledged that the Appellant added a red dye which was not the prescribed marker to the product as it was selling under the RDCO scheme where rebated sales had to be recorded and it did not want the product to be used as road fuel. Where selling a fuel oil a red marker was not required. When asked by counsel for Customs if this could give the impression of the sold item as something it was not he replied "Possibly".

Conclusion

It seems clear to me that the Appellant permitted inaccuracy in the use of the terms for the product sold. The evidence of Mr. Rennie is in effect that (if the product were, contrary to my finding, in fact fuel oil) the Appellant allowed unrebated fuel oil to be sold as rebated gas oil . These are 2 different technical products and may have misled customers as to what they were paying for and how they could satisfactorily use the product as well as Customs as to the chargeable duty.

However apart from this, the system of marking is subject to strict controls and a red dye was added by the Appellant without authority and in an unauthorised manner. Whatever the Appellant's directors may have thought the oil to be whether gas oil or fuel oil or for use as furnace fuel, the Regulations were breached.

Council Directive 2003/96/EC of 27 October 2003 (European Union)

Legislation

Article 18 provides as follows:

"18.By way of derogation from the provisions of the present directive, Member States are hereby authorised to continue to apply the reductions in the levels of taxation or exemptions set out in Annex II."

The Annex sets out the reduced rates for various Member States including under 15 those for the United Kingdom amongst which is

" - for waste oils which are reused as fuel, either directly after recovery or following a recycling process for waste oils, and where the reuse is subject to duty".

Evidence and submissions.

There appears to be no EU or UK definition of recycling. It was submitted however on behalf of the Appellant that its process was in line with EU and UK strategy to use the best technology for waste oil particularly as waste oil disposal becomes more problematic and costly. Mr. Rennie confirmed a commitment to regeneration and environment friendly processes. The evidence presented to me by counsel for Customs on the legal position was that the directive was permissive only not mandatory and that the UK Government had not taken up the benefit of the derogation available as to waste oil. Duty is payable in the UK only on imported oil or a product obtained by production or blending.

Conclusion

Whatever the environmentally positive nature of the Appellant's processes, the tribunal is satisfied that the process used is one of production. The Appellant is not able to claim the benefit of an exemption.

Appeal

On the basis of the conclusions reached above the appeal fails and is dismissed.

Customs have not sought costs and no direction as to costs is made.

ELSIE GILLILAND

CHAIRMAN

RELEASE DATE: 29 November 2007

MAN/06/8019