United Kingdom VAT & Duties Tribunals (Excise) Decisions

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Cite as: [2008] UKVAT(Excise) E01098, [2008] UKVAT(Excise) E1098

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Gerard Lilley (t/a Fuels and Lubricants (Enniskillen) v Revenue & Customs [2008] UKVAT(Excise) E01098 (18 March 2008)

E01098

Seizure of contaminated fuel – refusal to restore – appeal dismissed

MANCHESTER TRIBUNAL CENTRE

GERARD LILLEY TRADING AS

FUELS AND LUBRICANTS (ENNISKILLEN) Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Ian W Huddleston (Chairman)

Patricia Gordon

Sitting in public in Belfast on 14th November 2007

Mr. Michal Boyd of Counsel for the Appellant and

Mr. J. Puzey of Counsel for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appeal

This is an appeal by Mr. Gerard Lilley trading as Fuel and Lubricants (Enniskillen) ("the Appellant") against the Respondents' deemed confirmation of a decision not to restore 29,950 litres of derv contaminated with kerosene (rebated fuel) (in this Decision referred to as "derv" / "the derv") to the Appellant.

The Appellant wrote to the Respondent requesting restoration of the confiscated derv by a letter dated the 8^th November 2005. The Respondents refused restoration in their letter of the 6^th December 2005. Subsequent to that, the Appellant, in a letter dated 15^th February 2006 requested a review of the decision not to restore. Following a review, the Review Officer of the Respondents wrote to the Appellants on the 14^th July 2006 upholding the decision not to restore the derv. At this juncture, a couple of additional points need to be made. In the first place, the Respondents' letter of the 6^th December 2005 was wrongly dated and ought, in fact, to have been dated the 6^th January 2006. Secondly the July 2006 upholding letter was given outside the applicable 45 day time limit and therefore (from a technical perspective) the Appellant's case is against the January decision to refuse to restore the derv in question although as it adopted the same reasoning little turns on that issue.

Facts

The following facts were adduced to the Tribunal and relate to separate incidents.

The 2004 Incident

Evidence was adduced by a case officer on behalf of the Respondents that on the 5^th February 2004 at a vehicle check point on the Garvagh Road, Tempo, a fuel tanker was detected misusing kerosene. The driver of the tanker, a Mr. Francis Breslin, indicated that the Appellant owned the vehicle in question. That vehicle, together with five others, were then tested and found positive for euromarker, an indicator of the presence of kerosene. On that occasion the tankers were restored for a fee of £3,000 (paid by the Appellant) and an assessment was also raised for the duty evaded by the Appellant in the amount of £4,710 which was also subsequently paid. The relevance of this 2004 incident will become apparent.

The October 2005 Incident

The incident which leads to the substantive appeal before the Tribunal occurred in October 2005. Following the detection of a road vehicle running on derv contaminated with rebated fuel, the Respondents visited a filling station known as Garvey Filling Station, from where the driver of the vehicle in question had purchased the derv. As a result of further investigation, contaminated fuel was found in one of the fuel tanks, and as a result six hundred litres of fuel was seized from the owner of that filling station.

Further investigation revealed that the supplier of the filling station was the Appellant. Accordingly, officers of the Commissioners attended the Appellant's Enniskillen premises. Evidence was given by Orla Fitzpatrick on behalf of the Respondents that she initially drew a sample from the diesel outlet valve, indicated by an employee of the Appellant. The fuel extracted was yellow in colour and tested positive for euromarker, the marker which is found in all rebated fuels. Evidence was given that in accordance with Schedule 5 of the Hydrocarbon Oil Duties Act 1979 ("HODA"), she took three samples from the top of the tank, that were then tinned, sealed and labelled. Subsequent to the testing, 29,950 litres of derv was seized and uplifted, and it is the refusal to restore it that forms the basis of this appeal.

The test results established that the rebated fuel represented approximately 2% of the fuel uplifted based on the samples taken by Ms. Fitzpatrick. Mr. Liam Byrne, attached to the Road Fuel Testing Unit of the Respondents, confirmed that given the specific gravity of kerosene a 2% contamination level taken from the top of a tank, could mask a higher concentration of kerosene throughout the quantity of derv which was uplifted, but this Tribunal does not find that there is any need to draw any inference from that comment. Mr. Byrne did, however, give evidence as to the potential uses for contaminated fuel (if it were to be restored). It appeared from that evidence that because of the existence of kerosene there was no possibility that the contaminated derv could be used in road vehicles, and that essentially the only way of rendering it lawfully usable was by fractional distillation or, effectively, refining it again. This evidence the Tribunal accepts, and finds to be material in the context of its decision.

Legislative Position

HODA provides (per section 12(2)) as follows:

"No heavy oil on whose delivery for home use rebate has been allowed whether under section 11(1) above or section 13AA(1) below shall-

(a) be used as fuel for a road vehicle; or

(b) be taken into a road vehicle as fuel,

unless an amount equal to the amount for the time being allowable in respect of rebate on like oil has been paid to the Commissioners ……"

Section 13 of HODA further provides:

"Penalties for misuse of rebated heavy oil

(6) Any heavy oil-

(a) taken into a road vehicle as mentioned in section 12(2) above or supplied as mentioned in subsection (2) or (3) above ………

shall be liable to forfeiture.

(7) For the purposes of this section, a person is liable for heavy oil being taken into a road vehicle in contravention of section 12(2) above if he is at the time the person having the charge of the vehicle or is its owner ………"

The Finance Act 1994 (Sections 9 and 10) set out how the penalty is to be calculated and exceptions to the liability of the penalty.

The Customs & Excise Management Act 1979 ("CEMA") provides per section 139:

"Provisions as to detention , seizure and condemnation of goods, etc.

(1) Any thing liable to forfeiture under the Customs and Excise Acts may be seized or detained by any officer or constable or any members of Her Majesty's armed forces or coastguard."

Section 152(b) CEMA 1979 provides that the Commissioners may, as they see fit, restore, subject to such conditions (if any) as they think proper, any thing forfeited or seized.

As to the powers of this Tribunal, section 16(4) of the Finance Act 1994 provides:

"In relation to any decision as to an ancillary matter, or any decision on the review of such a decision, the powers of an appeal tribunal on an appeal under this section shall be confined to a power, where the Tribunal are satisfied that the Commissioners or other person making that decision could not reasonably have arrived at it, to do one or more of the following, that is to say-

(a) to direct the decision, so far as it remains in force, is to cease to have effect from such time as the Tribunal may direct;

(b) to require the Commissioners to conduct, in accordance with the directions of the Tribunal, a further review of the original decision; and

(c) in the case of a decision which has already been acted on or taken effect, and cannot be remedied by further review, to declare the decision to have been unreasonable and to give directions to the Commissioners as to the steps to be taken for securing the repetitions of the unreasonableness do not occur when comparable circumstances arise in the future".

In short, therefore, for any Tribunal such as this one, to exercise its powers under section 16(4) of the Finance Act 1994, it must first be satisfied that the Commissioners, through their officers (who made the decision on review not to restore the derv to the Appellant) could not reasonably have arrived at that decision.

Grounds of Appeal

The Appellant's Notice of Appeal sets out four grounds which (in summary) are as follows:

(a) that the Reviewing Officer placed undue weight and significance on, and misinterpreted, the seizure in February 2004 – essentially on the basis that it came about not through any deliberate act or wrong doing on the part of the Appellant, but by the errant actions of an employee;

(b) that whilst reference had been made in the Respondent's correspondence to the Appellant having been given a warning, that the Appellant had not received any written warning and could not recall any verbal warning and thus it was not a valid reason for the failure to restore;

(c) that the Appellant felt that given the small percentage of kerosene which had been found to be present in the derv, that it would be possible to have the contaminated oil "analysed, treated and/or filtered so as to render it usable";

(d) that, since there was no suggestion that the Appellant had been acting deliberately or wilfully in relation to the events which gave rise to the seizure, that the decision to refuse to restore the derv was both unjust and disproportionate in the circumstances.

In support of those grounds, Mr. Lilley gave evidence. He is a sole trader of a business which has seven lorries and a turnover of approximately £5.5 to £6m per annum. The majority of the business is in the sale of home heating oil (approximately 60/70%) with a further 25% in the sale of gas oil and a further small amount in the sale of derv. At the time of the hearing of the appeal he employed fourteen employees.

In advance of grounds (a) and (b) above, Mr. Lilley gave evidence as to the detail surrounding what is described above as the 2004 Incident. The person who was driving the tanker which was stopped on that occasion was Mr. Breslin. Mr. Breslin, at the relevant time, was the duty mechanic and had access in the evenings to all of the tankers for the purposes of refuelling. After the incident and payment of the fines and penalties the Appellant questioned his employees and it subsequently transpired that Mr. Breslin himself had been adding kerosene to the tankers over a period of three to four months and had been selling the uncontaminated fuel to third parties. Mr. Lilley gave evidence that as he was a good mechanic, he did not report Mr. Breslin to the police on that occasion and, by way of reimbursement of the fines which had been levied upon him, the Appellant deducted £50 per week from Mr. Breslin's wages over a period of time.

As a direct result of the incident, Mr. Lilley gave evidence that he took measures to increase his stock controls, and removed Mr. Breslin from some of his duties, keeping him deployed purely as a mechanic.

In support of ground (d) (at paragraph 15(d) above), and to explain how the derv may have become contaminated in the October 2005 Incident, Mr. Lilley advanced two propositions:

(a) the first was that he felt a supplier may have connected and delivered kerosene into the wrong tank, thereby contaminating the fuel; or (as an alternative)

(b) that one of his own tanker drivers (or more than one as the case may be) could have contaminated the "derv" tank with kerosene while clearing the hose reel line.

In advancing these propositions, Mr. Lilley suggested that the low level of contamination justified his conclusion, and further suggested to the Tribunal that, had he been deliberately trying to profiteer from actions of this type, he would, more likely than not, have involved himself in a greater level of contamination than that which was established by the Respondents. Indeed, he calculated the additional profit which would have been made on contamination of this level would have been in the region of £500.

Mr. Lilley then gave evidence that subsequent to the October 2005 Incident he did take some further remedial action, namely:

(a) all pipe work in the tank form was coloured coded to reflect the differing types of fuel which the business handled;

(b) the tanks were fitted with more accurate gauges;

(c) further improvements in stock control were implemented.

Although pleaded as one of the grounds of appeal (ground (c) (at paragraph above), no evidence was led in chief as to exactly how the contaminated fuel, were it to be returned to the Appellant, would be treated or disposed of lawfully, and it is perhaps useful at this point to note that in relation to such matters (and indeed the appeal generally) the burden of proof rests upon the Appellant in this regard.

The Respondent's Case

The Respondent's letter of the 6^th January 2006 (ie. that which is wrongly dated the 6^th December 2005) starts out by rehearsing the Commissioners' general policy, ie. that seized excise goods are not restored. It has been established elsewhere that there can be no dispute as to the ability of the Commissioners to develop, maintain and apply policies – a point which has already been noted by the President of this Tribunal in Dereczenik v Customs and Excise Commissioners [C00138].

In both the January 2006 letter, however, and the subsequent letter of July 2006, the Respondents pointed out that the policy is not absolute and cases are re-examined on their merits. The grounds for the decision not to restore in this case, as set out in the January 2006 correspondence, are briefly as follows:

(a) the fuel was contaminated and could not be used in any road vehicle;

(b) departmental policy prohibits the turn of contaminated fuel – regardless of whether the contamination is accidental or deliberate;

(c) that this was the second occasion where the Appellant had been found to be holding contaminated fuel;

(d) that a warning had previously been issued.

Taking those factors into account, the Respondents considered that restoration was inappropriate on the facts of this case. In substance, the July 2006 was in a similar vein.

Decision

As indicated above (paragraph 13), the role of this Tribunal is to assess whether that decision, ie. the decision not to restore the 29,950 litres of contaminated fuel was unreasonable in the circumstances of this case.

In making that assessment the Tribunal finds:

(a) that it was entirely appropriate and reasonable for the review officers to have regard to the first contamination incident (ie. that in February 2004). On that occasion they exercised their discretion to restore the tankers subject to the levies then applied. As to whether a written warning was issued at that time does not, to this Tribunal, appear to be material. It ought to have been sufficient, in this Tribunal's opinion, for the Appellant to deduce that corrective action was required because he, on that occasion, was both levied with, and subsequently paid, a penalty. Indeed, on that occasion he did take corrective action – but clearly those actions were not sufficient to stop a repeat incident occurring. This Tribunal therefore finds that the Respondents were entirely reasonable in taking the view that, as it had happened once, the Appellant ought to have learned from the incident and taken greater steps to ensure that contamination (whether accidental or not) did not reoccur. This finding disposes with the first two grounds set out in the Appellant's appeal notice;

(b) the ground which may have attracted this Tribunal was the use to which the contaminated fuel might be put. The Appellant, in his appeal notice, indicated that the derv could be (and here I quote again) "analysed, treated and/or filtered so as to render it usable". The only evidence before the Tribunal on this point was that which was given by Mr. Byrne, which made it quite clear that the fuel could not be very easily "doctored" to render it usable, and that the very existence of the kerosene made it unusable in road vehicles. The burden of proof in advancing a contrary argument rested with the Appellant and this Tribunal does not consider that it was discharged. The Tribunal, therefore, finds that given that there was no lawful alternative use for the fuel in question (other than one which could be established by effective re-distillation) that again it was entirely reasonable for the Commissioners to take the view which they in light of their established (and published policy) did and refuse to restore it;

(c) the fourth (and final) ground which the Appellant pleaded in his appeal notice was that essentially as the incident did not occur deliberately or wilfully and, taking all other factors into account, equity would dictate that the fuel should be restored. The Tribunal is not convinced by what is effectively a plea in mitigation. Given the circumstances surrounding the February 2004 incident it is clear that whatever remedial steps the Appellant took then were insufficient. Indeed, by Mr. Lilley's own evidence he indicated that he had since the October 2005 incident, taken further remedial steps ie. installing coloured pipes and more accurate gauges to prevent the further occurrence of an event of this type. These steps seemed to the Tribunal to be a reasonably obvious precaution, and one which would not have incurred him in excessive expenditure. The Tribunal concludes, therefore, that had those steps been taken earlier, then any accidental discharge (and therefore contamination) of the quality of his fuel would have been prevented. The reality is that suppliers of fuel need to take very great care that they do not breach the detailed requirements imposed on them by legislation, in particular where they are retailing directly or indirectly to members of the public who likewise might face penalties and forfeiture of their property if they are found to be using contaminated fuel. The possibility of innocent purchasers of fuel suffering either penalty or forfeiture of goods ought to be sufficient to provide for good governance. To the extent, however, it does not, then the Commissioners' policy of refusing to restore fuel – save in circumstances where they feel it is merited on the facts of the case – is one which should no doubt force suppliers to act with proper care and diligence.

Conclusion

In conclusion, therefore, for the foregoing reasons, this Tribunal finds that the decision taken by the reviewing officers to confirm that the derv would not be restored to the Appellant was entirely reasonable on the facts of this case, and dismisses the appeal.

No order as to costs.

Ian Huddleston

CHAIRMAN
Release Date: 18 March 2008

MAN/2007/8048