United Kingdom VAT & Duties Tribunals (Excise) Decisions

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Cite as: [2008] UKVAT(Excise) E1100, [2008] UKVAT(Excise) E01100

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Grapevine Storage Services Ltd v Revenue & Customs [2008] UKVAT(Excise) E01100 (19 March 2008)

E01100

EXCISE – Refusal of application to approve a place of security for the deposit of excise goods – Deemed decision made after expiry of 45 days – Whether appeal against initial decision or review decision – Both officers failed to disclose concerns about another bonded warehouse – Whether those concerns influenced decision – Decision purportedly taken on basis lack of commercial viability – Both officers made mistakes in calculations – Whether decision reasonable – s.92(1) Customs & Excise Management Act 1979 – S.16(4)(c) Finance Act – Appeal allowed

LONDON TRIBUNAL CENTRE

GRAPEVINE STORAGE SERVICES LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: MISS J C GORT (Chairman)

MRS J M NEILL ACA

Sitting in public in London on 24 January and 4 April 2005, 27 February and 23, 24 and 25 April and 12 December 2007

Mr Andrew Young of counsel, instructed by Vincent Curley & Co LLP, for the Appellant

Mr Andrew O'Connor of counsel, instructed by the Solicitor's Office, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This is an appeal against a deemed decision by the Commissioners to uphold a decision made on 18 November 2002 not to approve a place of security for the deposit of excise goods. The original decision was reviewed, but the review decision was dated 3 March 2003, and was therefore outside the 45 days allowed to the Commissioners by s.15 of the Finance Act 1994 to conduct such a review. The statement of case itself, despite the terms of the notice of appeal, treats the appeal as being one against the review decision. We will return to this issue later.

By a letter dated 18 November 2002 from Miss Teresa Jolly the Commissioners rejected Grapevine's application for warehouse approval for the following reasons:

The Company is not commercially viable.

It is not physically possible to deal with the number of loads proposed with the number of staff to be employed.

You have not demonstrated the need for a facility of this nature in the area.

The lack of knowledge in warehousing operation by Mr Ellis and yourself.

Following the refusal of the initial application, Grapevine had asked for a review of the decision. The review officer, Miss Park, did not complete her review inside the statutory 45 days time limit for such a review. Her decision is contained in a letter dated 3 March 2003, and in it she rejected Grapevine's application, however the only one of the reasons advanced by Miss Jolly which was upheld by Miss Park is that Miss Park also did not believe that the Company would be financially viable; the other reasons for not allowing the application were dismissed. Miss Park appears not to have been aware that her review was completed out of time, and that therefore any subsequent appeal would be against the original decision. It was only late in the proceedings that it was conceded by Mr O'Connor that this was in fact the case, but he also submitted that there were two appeals on foot: one against Miss Jolly's decision and one against that of Miss Park. We will deal with this issue later.

The grounds of appeal in the notice of appeal, which is dated 31 March 2003, are as follows:

"The original refusal to approve our application is based on four points against which we feel we can show that Customs and Excise are demonstrating poor judgment in their conclusion. We will show:-

(1) that we are capable of operating the business both efficiently and profitably, with no risk to government duties and VAT;

(2) that the cashflow figures re-calculated by Customs and Excise, only include changes to income with no regard to corresponding costs. The supposed £153k loss at the end of year 2, should in fact be a £47k profit.

(3) that we have commitments from potential customers, showing their knowledge of our proposed rates."

Prior to the 24 January 2005, the first day of the hearing of this appeal, and throughout the entire period up to and including the 12 December 2007, there were issues regarding disclosure by the Respondents of relevant documents. Whilst it would not be usual to set out in detail the numerous issues that have arisen with regard to disclosure, in this particular case we feel it is essential to do so because the matters not disclosed are relevant to the issue of the reasonability of the Commissioners' decision and because of the unusual circumstances which existed in 2001 and 2002 in respect of the Commissioners' dealing with bonded warehouses. The last relevant document was only put before the Tribunal on 12 December 2007 despite there having been a direction by the Tribunal as long ago as 10 June 2003 that the Review Officer should produce all documentary material considered by her.

The Law

The Customs and Excise Management Act 1979 provides under the heading "Approval of warehouses":

Section 92(1): The Commissioners may approve, for such period and subject to such conditions as they think fit, places of security for the deposit, keeping and securing –

(a) of imported goods chargeable as such with excise duty (whether or not also chargeable with customs duty) without payment of the excise duty;

(b) of goods for exportation or for use as stores, being goods not eligible for home use;

(c) of goods manufactured or produced in the United Kingdom … and permitted by or under the Customs and Excise Acts to be warehoused without payment of any duty of excise chargeable thereon;

(d) of good imported into or manufactured or produced in the United Kingdom … and permitted by or under the Customs and Excise Acts to be warehoused on drawback,

Subject to and in accordance with warehousing regulations; and any place of security so approved is referred to in this Act as an "excise warehouse".

The Finance Act 1994 ("the Act") provides as follows:

Section 15 Review Procedure

(1) Where the Commissioners are required in accordance with this Chapter to review any decision it shall be their duty to do so and they may, on that review, either –

(a) confirm the decision; or

(b) withdraw or vary the decision and take such further steps (if any) in consequence of the withdrawal or variation as they may consider appropriate.

(2) Where –

(a) it is the duty of the Commissioners in pursuance of a requirement by any person under section 14 above to review any decision; and

(b) they do not, within the period of 45 days beginning with the day on which the review was required, give notice to that person of their determination on the review,

they shall be assumed for the purposes of this Chapter to have confirmed the decision.

Appeals to a tribunal

…

(4) 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 that 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 taking effect and cannot be remedied by a further review, to declare the decision to have been unreasonable and to give direction to the commissioners as to steps to be taken for securing that repetitions of the unreasonableness do not occur when comparable circumstances arise in future."

The Facts

The Tribunal heard oral evidence from Miss Teresa Jolly, the officer who made the original refusal decision and Miss Daphne Park, the officer who carried out the review of Miss Jolly's decision. An agreed bundle of documents was provided initially. There were many other documents disclosed by the Commissioners subsequently, further to directions of the Tribunal.

There are two directors of the Appellant company, Grapevine Storage Services Ltd ("Grapevine"), a Mr Jeffrey Rivers and Mr Kevin Ellis. We did not hear from Mr Ellis in the course of this appeal and the evidence we have in relation to Grapevine comes from Mr Rivers. Mr Rivers is a financial and management accountant who is a member of the Association of Accounting Technicians, and had, at the time of the start of this appeal, been in practice for 25 years.

On 16 April 2002 Mr Rivers made an application on behalf of Grapevine, for approval to operate an excise warehouse. In that letter of April 2002 he requested information on the basis that he was interested in taking on the lease of a warehouse, but was not at the time in possession of a lease of the premises which were under consideration. He wished approval for the storage of wines, beers and spirits under bond.

For the two years prior to making that application Mr Rivers had been finance manager of a bonded warehouse known as Oakwood Storage Services Ltd ("Oakwoods"). This business was closed down by the Commissioners at the end of November 2001, purportedly for health and safety reasons. It emerged from the documents that it was believed by the Commissioners that fraud was being carried out at Oakwoods, although no action for fraud was ever taken by the Commissioners against Oakwoods.

Mr Rivers sent a letter dated 3 August 2002 to the Commissioners setting out various matters in relation to the proposed bonded warehouse. He estimated there would be a throughput of 75,000 cases per week, with an average duty liability of £5m on goods in the warehouse at any time. The warehouse is 47,000 sq. ft. and is a purpose-built property. 95% of the stockholding was intended to be Beers, Wines and Spirits; Mr Rivers intended to offer other storage facilities whilst the business was growing. He had based his calculations on the assumption that the warehouse would be 60% full at all times, i.e. there would be 135 full loads, 100 being beer and 35 being spirits. Should the warehouse reach capacity with the same ratio of beers to spirits, then the duty liability would rise to £9m. The storage would be of customers' goods only, and insurance would be the responsibility of the customer. It was assumed that 90% of the goods would be moved under duty suspension to various bonded warehouses abroad. The premises would be secured by an ADT 24-hour monitoring system, linked directly to the emergency services. The services of a security company would be employed when the premises were occupied. At the initial stage it was intended that both directors would use their own properties as guarantee. The share capital was to be provided by way of a bank loan.

Following Grapevine's application for approval, two officers of the Commissioners, Miss Teresa Jolly and a Mr Pratt, carried out a site visit on 11 September 2002 to the proposed warehouse in Rainham, Essex. Prior to carrying out the visit Miss Jolly had sent an e-mail to a colleague at the Glasgow Excise Audit (WOWGR) saying:

"We will be visiting this trader on Wednesday, it is the successor to Oakwoods."

This e-mail was only disclosed to the Appellant at the resumed hearing on 24 April 2007 together with a number of other previously undisclosed documents.

It would appear from a witness statement of Miss Jolly dated 19 January 2005 that Mr Pratt had been one of the assurance officers who visited Oakwoods and indeed Mr Rivers confirmed that he had dealt with him at Oakwoods. During the course of that visit Mr Rivers provided Miss Jolly with a Business Plan and subsequently provided an Audit Trail. Miss Jolly's note of the visit on 11 September 2002 states inter alia that she examined the Business Plan and checked for commerciality and viability of the business, trading patterns and how Grapevine intended to set up. She commented on there being no other collateral other than the directors' houses for a £100,000 loan from the bank, that there is no mention in the Business Plan of how it was intended to repay the loan, and that the closing balance figures do not include the £100,000 loan. In addition she noted that no allowance was made for seasonal fluctuations, and therefore Grapevine might not make its break even point of eight loads per day. She had been given no details of movements out, except for the comment that stock is expected to turn round every two weeks, so there may be fifty loads going out per week. She stated:

"Assuming that one forklift takes 1.5 hours to unload, stow away and complete the paperwork, in a 7.5 hour day they can unload five vehicles. If they are going to employ two forklift drivers, this gives them the capability to unload ten vehicles a day but it would have to be at the same time. This will be impossible if they only have one shutter open, additionally they will not be able to load any vehicles out if they do not have enough staff, forklifts or shutters open. There will be H&S implications with this."

Miss Jolly recorded that the audit trail was examined for gaps, omissions and weaknesses. Following a reply by Mr Rivers to various of her queries in a letter dated 9 October 2002, on 31 October 2002 Miss Jolly added in a paragraph to the effect that the Business Plan figures had been reworked to take account of the bank loan, but this "reinforced the fact that he has to bring in 8 containers 5 days a week for 52 weeks of the year. To make a profit he has to bring in more, he has also stated that he hoped to bring in 10 a day. He is hoping to despatch out of the warehouse 40 loads per week. This makes it more unlikely for this business to work with just 2 forklift drivers, he will need more, which will then push up his break-even point."

Miss Jolly considered it not physically possible to deal with a number of loads proposed given the number staff to be employed. Mr Rivers' reply to this, which was contained in a letter to her dated 28 November 2002, was that he had budgeted for ten loads being received each day, and two warehouse operators (forklift truck drivers) and one foreman together with Mr Ellis who would have overall responsibility for the layout and upkeep of the warehouse. He considered ten loads going in each day and ten loads coming out each day, i.e. a total of twenty loads per day was achievable with three qualified forklift truck drivers, but, if it were not, then the warehouse staff would have to be changed. In her reply to this letter Miss Jolly referred to the fact that Mr Rivers said he intended to use only one of the four shutters available at the warehouse, which would mean that the three forklifts would be operating in the same area at the same time all day, which had health and safety and practicality implications. The evidence before us from Mr Rivers was that the intention was, for security reasons, to close other shutters when they were not being used, but that they were available to be opened if necessary and this had been explained to Miss Jolly. We were shown a photograph of the building with one of the shutters open (a photograph which was taken some time after Grapevine ceased to have an interest in the premises) which appeared to show that there was plenty of space for one forklift truck to pass another whilst going through the opening. When asked about this further evidence from Mr Rivers, Miss Jolly accepted it was possible she might have changed her decision if this evidence had come in previously, but repeated that the case was primarily rejected on the lack of commercial viability. She accepted that if the door opening were 30ft there would be no health and safety issues in the present case. The evidence before us was not sufficiently precise for us to make a finding as to the width of the opening, but we prefer the evidence of Mr Rivers to that of Miss Jolly with regard to the intention to open other shutters as necessary.

Under the heading in her notes "irregularities identified" Miss Jolly stated:

The company does not appear to be commercially viable, if all the money the directors need to take out is done (sic), they will not make a profit, based on flawed figures, until the 23rd month of trading.

There are a number of gaps in the audit trail.

One director (Kevin Ellis) has no knowledge of warehousing and the other (Jeff Rivers) was the finance director for Oakwoods Storage.

Under the heading "conclusions" she stated that, based on the current information (i.e. before she received a reply to her letter to Mr Rivers) Grapevine were not likely to get a WOWGR registration or a warehouse approval, and on 31 October 2002 (after receipt of Mr Rivers' letter) she confirmed her previous conclusion not to approve the warehouse.

A subsequent note made by Miss Jolly dated 12 November 2002 (which we will refer to later) gives a résumé of the proposals and includes a statement that Mr Ellis was currently working for Oakwoods Distribution as a driver, had previously worked in the asbestos industry and had no experience of warehousing. A letter dated 28 May 2003 was produced on behalf of Grapevine for the Tribunal hearing from Acrise Freight Depot, signed by a director of that company, stating that Kevin Ellis had been employed by the company since January 2003 where his duties included delivery and maintenance of company plant and equipment, as well as all aspects of warehouse control. The letter continues:

"I have found his knowledge of Health & Safety to be invaluable to this company, and his ideas for both rotation of stock and stock control have led to a more efficiently run warehouse."

The letter also stated that:

"Kevin has settled very quickly into an environment far removed from his previous occupation. …"

and therefore it appears that whilst he had no previous warehouse experience at the time Miss Jolly made her decision, nonetheless he was capable of learning to operate a warehouse efficiently.

The Business Plan itself shows under the heading "guarantees" the following:

Potential Duty on month-end Stockholding Level of Security

£100,000 Nil

<£100,00 but <£400,000 £100,000

>£400,000 but <£1m 25% as potential duty

>£1m but <£25m £250,000

>£25m but <£100m 1% of potential duty

>£100m £1m

We would come into the >£1m but <£25m category, the guarantee we would need to put in place would be £250,000. We would initially provide this guarantee by putting our properties up as collateral, but would expect to be able to free up the properties and deposit a cash sum towards the end of the second year."

The document then refers to the levels of security set by Customs which are the same as the chart above, and continues:

"As mentioned before all movements from bond would be under the hauliers' movement guarantee so no guarantee would be required from ourselves."

Under the heading "Pay back of Loans/Guarantees is as follows:

"Within our projected figures we have assumed a borrowing of £100,000 which we intend to pay back by the end of the first year. This borrowing is to cover three months running expenses and assumes that we will have no revenue until the end of the third month. We are quite confident that this is the worst case scenario and in fact some revenue will be generated before then.

"The guarantee, as mentioned earlier, will take the form of our properties being put up as collateral, and it is our intention to be able to free up the properties and deposit a cash sum towards the end of the second year."

Grapevine had initially provided Miss Jolly with six letters from potential customers, including Venus & Co Cash and Carry Ltd, who expressed an interest in giving Grapevine custom, provided the rates were competitive. The letter from the financial director of Venus & Co states that he strongly believed there was a need for a new bonded warehouse in the region. Subsequently (but after Miss Jolly had made her decision) Mr Rivers produced to the Commissioners a further ten letters, some from the same people as had previously written, dated May and June 2003, stating that they found the rates projected were competitive and they would be happy to use the facility.

Included in the bundle of documents for the Tribunal there was a document headed 'summary of trading activities and records compiled by Miss Jolly dated 12 November 2002. This document makes no reference to Oakwoods beyond saying that Mr Rivers was currently finance manager at Time Cash & Carry, he had previously worked for Oakwoods 'in a similar capacity', and that Mr Ellis was currently working for Oakwoods. Under the heading 'remarks' it says: "To be rejected along with the warehouse application". Miss Jolly's notes dated 31 October 2002 refer to the visit on 11 September 2002, and there is a reference to Mr Rivers being the finance director at Oakwoods. This reference appears under a heading 'Irregularities identified'. Both these two documents are typed. At the final hearing of this appeal, which was on 12 December 2007, and was a hearing to explain why the Commissioners had repeatedly failed to produce all the relevant documentation, a different version of Miss Jolly's report of 31 October 2002 was produced. This document was also a pro forma in respect of Grapevine's application for excise warehouse approval, but on this occasion Miss Jolly had completed her answers by hand rather than typing them. In it she refers to there being a number of gaps in the audit trail and recommends that the application for approval be refused on the basis that the company was not commercially viable based on the breakeven point and because she did not believe it was physically possible to get the proposed number of loads in to reach the breakeven point. Under a heading on the final page which asks the question whether a financial guarantee should be demanded she has circled "yes". Under the heading 'Reasons for decision' is written: 'Previous involvement in Oakwoods'. She recommended a guarantee of £250,000. Because this document came in long after the hearing of the evidence in this case it was not possible to put to Miss Jolly the specific implications of this document, or why it was not disclosed earlier. It appears to us probable that it was the first version of her notes, both because it is handwritten, and because it recommends a guarantee, which does not appear in the other two documents.

Following Miss Jolly's rejection of the application, Mr Rivers provided to the Commissioners a letter from a branch manager of the HSBC bank dated 7 February 2003 written `to whom it may concern' about Grapevine which says as follows:

"I write with regard to the above client and wish to confirm that I was seriously considering financial proposals from Mr J Rivers in respect of an excise warehouse located around the Essex area although a formal offer of assistance was not made due to the early stages of our discussions."

It was Mr Rivers' evidence that the bank were only willing to give the finance to the company once the warehouse licence had been obtained, and therefore it was not possible to obtain from the bank a more definite commitment to the provision of finance.

Whilst it is more common for customers when purchasing goods from a warehouse to pay the duty pre-release to the warehouse itself, it is also possible for them to pay directly to the Commissioners, and this was what Grapevine intended should happen. This appears to have been a matter not considered by either Miss Jolly or Miss Park, although paragraph 15 of the Business Plan states as follows:

"We calculate the Duty and the VAT payable and advise Venus, who will need to draw a bankers draft made payable to HMC&E. The draft needs to be with us, as explained, prior to the goods leaving the warehouse. We then need to complete a form W5 showing details of the duty calculation and lodge with the draft at Customs & Excise at Tilbury. There will be an admin charge to Venus for this service."

In his letter of 9 October 2002 to Miss Jolly Mr Rivers had said that she was correct in her observation that there had been no mention of the repayment of the loan and he therefore had enclosed a revised two-year cash forecast showing the monthly repayments. It was intended to repay the loan over a two-year period with an interest charge of 9% per annum on the outstanding balance.

The primary source of revenue for a bonded warehouse is the amount charged in respect of what is known as RH&D, which stands for Receipt, Handling and Distribution. The figures produced to Miss Jolly under cover of the letter of 9 October 2002 show that Grapevine intended charging £8.50 in respect of this. The charge includes the cost of unloading from the vehicle, for putting away in the warehouse and the subsequent loading onto the vehicle for delivery from the warehouse. Grapevine had estimated that its annual receipt from RH&D would be £530,400. The secondary source of income would be for storage, and this at that time was estimated as being £280,800. In these initial projections (which were headed 'assumptions') the total income was estimated at £863,200. The total outgoings were estimated at £673,749, which included bank charges of £20,000. At that time the rent was given as £5.75 per square foot i.e. £270,000 per annum (rounded up). Storage was to be charged at £2.00 per pallet per week. There were estimated to be ten in bond transfers each day.

Subsequent figures were produced by Grapevine after the appeal was lodged. On this occasion the figure for rent is reduced to £4.50 per square foot making £209,151 per annum, the rateable value is reduced from £180,000 to £149,000 with a factor of 44p in the pound as opposed to 43p in the pound as previously estimated, thus making an annual payment of £66,156 as opposed to £77,400 per annum. It is estimated that fifty full loads will be received each week, but in addition it is stated that 75% of the loads will comprise beers and 25% will be spirits. Wines were included with beers in the 75% because wines would comprise an insignificant amount of the total. In these figures RH&D is to be charged at £6.00 per pallet for beers and wines and £8.00 per pallet for spirits. Storage instead of being charged at a global £2.00 per pallet per week is to be charged at £1.75 per pallet for beers and wines and £2.25 per pallet for spirits. There were estimated to be five in bond transfers each day at £25.00 per rotation. The effect of these changed figures is that the income from RH&D is given as being £370,656 annually, the income from storage as being £287,820 and the total annual income is estimated at £722,176. The bank charges are now given as only £10,000 per annum. The net profit is reduced to £109,569. Although this evidence post-dates both decisions, it shows the flexibility of Grapevine's approach and its willingness to take account of the Commissioners' concerns. The profit and loss accounts provided by Grapevine are erroneously based on the company having an income during the first two months of trading, which would not have been the case. This fact was not picked up by either Miss Jolly or Miss Park, who both calculated the income on the basis of income being received during the first two months.

Miss Jolly had made enquiries in the area of other bonded warehouses, although she did not have this evidence before her at the time she made her decision, it was sent by her to Miss Park and Miss Park had it and considered it prior to making her decision. Two of the reports of visits to traders related to visits in December 2001. The first one showed that the RH&D was £5.00-£5.50 for wine and beer and £7.00-£7.50 for spirits, rent was £1.50 per pallet per week and stock transfers were £25.00 each transfer. That warehouse held 80% beer. The second visit report showed that there was an RH&D of £6.00 per pallet, storage was shown as 2p per case per week. 95% of its storage was of beer. The customers had to pay duty and VAT before release of the goods. The third visit report relates to a visit in December 2002. This warehouse appeared to store principally wine and the charge worked out at £4.53 per pallet. The case storage rent was £0.85 per case per week and there was an average stockholding of 2.5m cases.

On 7 February 2003 Miss Jolly had written a note to Miss Park in reply to an e-mail from her dated 17 January 2003 setting out her reasoning in respect of three of the four reasons she had given in her letter of 18 November 2002 for refusing the application. She did not state anything further about the second reason in her earlier letter, namely that it was not physically possible to deal with the number of loads proposed with the number of staff to be employed. In that note Miss Jolly demonstrates that she does not fully understand accounting terminology. She sets out the rent and the handling charges (incidentally giving £5.50 per pallet as the RH&D charge, saying that this price is at the top end of current warehouse charges, which was not in fact the case). She concludes that this provides a total revenue figure of £50,128 per month and she then applies this figure to Grapevine's Business Plan and says: "It gives the following profit figures" (our underlining), in fact she is citing the cashflow figures. She then sets out month-by-month cumulative figures purporting to show a 'loss' at the end of year one of £147,183. This is not a loss, but is a forecast bank balance after a proposed repayment of the loan of £45,000 and a transfer of the guarantee to a deposit of £50,000. In cross-examination Mr Rivers had confirmed that both the capital payments, i.e. the repayment of the loan totalling £45,000 and the transfer of the guarantee to a deposit of £50,000, could be varied, depending on the cashflow position. Miss Jolly saw the profitability of the company getting worse over a period of ten years, she described the net loss as starting to decrease but then going up again and she could not see it improving. She had however mistaken the figures produced by Mr Rivers. She had failed to take account of the fact that repayments of loans and guarantees are capital figures not profit and loss figures and therefore should not be included when calculating net profit. This meant that she had incorrectly calculated the profit and loss figures by including as expenses the repayment of the loan and the proposed transfer of the guarantee to a deposit of £50,000 in the first year of trading.

Miss Jolly had the mistaken impression that Grapevine would be dealing with 95% beer as opposed to the 75% which was the proportion shown in the second set of projections provided by Mr Rivers. However, these later figures were not before Miss Jolly and no such breakdown was given in the first set. In her notes she records that Grapevine is considering racking part of the warehouse, which would only be done if there were a demand for wine. The traders whose figures she used to make the analysis on 7 February 2003 were predominantly providing storage for beer. She acknowledged that there was a significant difference between the charge for warehousing beer and that for wines and spirits and this would affect the profitability of the company. She did not know the ratio of beer to wines and spirits in respect of the company she had visited in December 2002.

Towards the end of the note of 7 February 2003 Miss Jolly made a reference to Oakwoods (set out below) which led to an application on behalf of Grapevine which was heard in the Tribunal on 28 January 2004. The President directed that

"Teresa Jolly … shall by the end of February 2004 lodge a witness statement explaining the following passage in that note (of 7 February 2003) –

"I have no disclosable evidence at this point about J Rivers' involvement of the fraud carried out by Oakwoods, as the tribunal process is still taking place".

and if the decision appealed against in these proceedings is in any manner based on the understanding that J Rivers was involved in the fraud carried out by Oakwoods, Teresa Jolly shall provide a list of the documents and other materials upon which that understanding is based."

As a consequence of that direction on 29 April 2004 (i.e. some two months after the expiry of the time limit in that direction) the Commissioners forwarded to Grapevine's solicitors a witness statement dated 11 February 2004. In that witness statement Miss Jolly said:

"I have no documentary evidence, I have been advised by the assurance staff that visited Oakwoods, that J Rivers was responsible for the financial records and as such must have been aware of what was happening … (word cut off in the Tribunal's copy) the business, although he has denied knowing anything. I was not involved with Oakwoods myself, which is why I was asked to deal with the approval.

"I have not used this statement to reject the approval as I do not hold any evidence to show that J Rivers was involved. The rejection was based primarily on the viability of the business and the potential risk to the revenue."

Miss Jolly subsequently, on 19 January 2005 (i.e. very shortly before the first hearing of this appeal), made a further witness statement relating to Oakwoods in which she said as follows:

"… I wish to clarify my knowledge of a warehouse named Oakwoods Storage Services Ltd at the time I was dealing with an application by the appellant to become approved as a bonded warehouse.

Closure of Oakswoods by HMC&E took place before I joined the H&M team. To the best of my knowledge, broad events were as follows:

Notice to revoke approval issued October 2001

Notice of closure issued and to be closed 31/12/01

HMC&E running warehouse from 1/1/02

Poor record keeping and evidence of diversion fraud but this was not pursued

Tribunal/High Court process regarding closure of Oakwoods

I joined the H&M team 24/6/02

Grapevine's application came into my office August 2002

In September 2002 I was tasked with dealing with the application because

Mr Rivers was involved in the application

I was not involved in Oakwoods in any way, and my manager wanted the application to be dealt with by someone who had not been involved with Oakwoods previously.

I had experience in testing commerciality of businesses

For the period in which I was considering the application I had no involvement in the enquiries that were going on into Oakwoods, nor did I discuss them with anyone. During that period I was not aware of any evidence of diversion fraud having taken place at Oakwoods.

My decision of 18 November 2002 was made purely on the grounds set out in my letter. I did subsequently become aware, from the other members of my team (whose identities I cannot now remember) that there was evidence of diversion fraud having taken place at Oakwoods, although I did not discuss these matters in any details.

The source of my statement that Mr Rivers has denied knowing anything was a colleague who accompanied me on my visit to Grapevine. He stated that Mr Rivers explain to him as an assurance officer visiting Oakwoods that he only knew about the accounts side and nothing that went on outside his office i.e. the warehouse."

We are surprised by the contents of this witness statement insofar as they relate to Miss Jolly's not having discussed Oakwoods, given not only Miss Jolly's reference in the letter of February 2003 to having no "disclosable" evidence, which clearly implies that she had some evidence, none of which has been produced, but also her reference in her typed notes of 31 October under the heading "irregularities identified" to Mr Rivers being the finance director for Oakwoods (which he was not) and the reason for the recommendation of a £250,000 guarantee in her handwritten notes as being 'previous involvement in Oakwoods'. We do not find it credible, at a time when the London City Bond warehouse was under investigation for diversion fraud (although this was not known publicly at the time) and at a time when it was, as the documents here show, clearly thought that there had been fraud at Oakwoods, that Miss Jolly would not at the time have discussed this in some detail with her colleagues, and in particular with the officer who accompanied her to meet Mr Rivers, given that that officer had encountered Mr Rivers at Oakwoods. This view is supported by the fact that on 10 January 2003 she had informed Miss Park that Oakwoods had been closed for diversion fraud (see paragraph 36 below) and also, in the same note, had said:

"One of the directors has no knowledge and the other has limited knowledge … I also suspect there is someone else behind this but have no evidence to support that."

Whilst it may well have been that there was no evidence of diversion fraud at Oakwoods, we do not accept that Miss Jolly's decision was made 'purely on the grounds set out in my letter', as she claimed in her witness statement. Her note to Miss Park implies quite the opposite.

Miss Park, the review officer, communicated with Miss Jolly by e-mail and letter. They did not meet, being based in different parts of the country. Miss Park did not herself accept Miss Jolly's opinion that lack of experience was sufficient to refuse the warehouse licence. She did not think the loading times were an issue, nor did she think that the failure to demonstrate a need for the warehouse was significant in that it was inevitably difficult to get customers prior to setting up. With regard to the issue of commercial viability of the project, she did not think that the letter from the HSBC bank carried much weight. In her calculations Miss Park had taken the figure for RH&D at £7.00 and £2.00 for rent. She had not accepted Miss Jolly's figures. Taking the cashflow figures provided by Mr Rivers, she took the view that the overheads could not be properly funded and therefore corners might be cut on security or staff wages. She believed that there was a risk to the Commissioners if there were less security, or wages were unpaid because the employees might then steal from Grapevine. Miss Park had looked at Mr Rivers' original cashflow projections and had made the same errors as Miss Jolly in that she had included capital items in the calculation of the profitability of the company, and had failed to notice that the profit and loss account ascribed income to Grapevine during the first two months of trading, as distinct from the profit and loss account, which did not.

In her evidence to the Tribunal Miss Jolly had referred to the Commissioners' internal guidance. Mr Young on behalf of Grapevine asked for this guidance to be disclosed. Initially the Commissioners were not prepared to disclose the document, not even to the Tribunal to consider whether or not it was relevant and ought to be disclosed to Grapevine. After considerable argument and considerable delay, a redacted version was disclosed. After further argument and delay which in part was caused by the document being a "living" document which is continually updated, and therefore obtaining the document as it was at the time Miss Jolly would have seen it was a difficult exercise, the Tribunal and Mr Young were eventually provided with a version. This document at paragraph 5 is headed "Approval of Warehoused Premises". Paragraph 5.5 relates to the circumstances in which an application for premises approval can be rejected. Under that heading it says inter alia that officers must base their judgment on information that can be released into the public domain and intelligence data cannot be used as a reason for rejection. Paragraph 5.1.1 relates to the information that may be used to help decide whether to approve or reject an application. Under this heading it is stated inter alia that if a warehousekeeper or any of his key staff can be shown to have been involved in non-compliant, fraudulent warehouses or facilitated fraud by negligence in the past they should not normally be approved. People actively involved in previous excise frauds could move to a new warehouse, but will not always appear as the actual warehousekeeper. The officer is also to consider the identity of prospective customers and whether they are known fraudsters, missing traders, insolvent traders or non-compliant traders.

An annex to the document relates to the rejection of applications for Excise Warehouse Premises approval. One of those issues is that the applicant has failed to demonstrate the commercial viability/need for the warehouse approval. Miss Park gave evidence to the Tribunal that her decision was based on information that could be released into the public domain, however we did not find Miss Park to be a reliable witness. She gave clear evidence to us that she was unaware that Oakwoods had been closed by the Commissioners when she made her decision and she also said she had no knowledge of Mr Rivers and his fellow director as to whether they were fit and proper people, and no question over the bona fides of the directors had been brought to her attention. In the course of her evidence Miss Park made reference to the Commissioners' Unit of Expertise and said that she had corresponded with that Unit by e-mail. No such correspondence had previously been disclosed. This necessitated a short adjournment for counsel to review the file and examine the e-mails in question. The e-mails were then produced to the Tribunal and to Mr Young. Enclosed with these documents was a reply by Miss Jolly to enquiries by Miss Park made by e-mail at the outset of her review. In that reply, which is dated 10 January 2003, at paragraph 1 Miss Jolly said:

"The checks were completed by the NAVC on the directors and the proposed customers. The directors are `clean' with regard to CEDRIC but J Rivers was involved in the running of the Oakwoods warehouse which was closed by the Department for diversion fraud and not meeting C&E requirements. A number of the customers have positive indicators on CEDRIC and these are enclosed in the file."

This makes it abundantly clear that Miss Park had been informed about Oakwoods and also that Miss Jolly herself had had Oakwoods in mind. With regard to the e-mails with the Unit of Expertise, in an e-mail dated 3 February 2003 Miss Park wrote:

"Reading between the lines of this case, one of the Directors was previously employed in a warehouse that Customs has shut down, I don't think we have any evidence to link this individual to anything and most of the potential customers are known to Customs, most of them are involved in ongoing potential frauds. However, none of these is/has been disclosed. My problem being that my review can therefore only look at the reasons for refusing the approval … and I can't (at this stage) see enough to uphold the officer's decision. Also should the case go to the Tribunal, I think we'd have difficulty justifying our decision. … Unless we can come up with more concrete reasons, I have no choice but to overturn the officer's decision, this then means the approval would have to be granted. One of my colleagues here felt that because we didn't go down the route of approving with conditions/securities we probably couldn't go back and approve with conditions."

In his reply to this e-mail Mr Murdo Macleod stated that he had not come across commercial viability being given as a reason for rejecting approval and he continued:

"Also if the bank … is prepared to lend money on the strength of their business case, we are hardly qualified to say that the Co. is not commercially viable … I take the view that commercial viability should be accepted if there is evidence that a bank is prepared to back them. … If they satisfy the approval criteria we can still impose conditions and financial guarantees."

Mr Macleod forwarded this to his seniors and a Mr Eddie McCormack replied to Mr Macleod stating he was particularly interested in the compliance history of the individuals, and he asked various questions about them. He stated that commercial viability could reasonably be cited as a reason for rejecting an application.

A further document which was disclosed at the same time as the guidance was a "Dear Colleague" letter which was posted on the Commissioners' Intranet dated 24 May 2001 with reference to new arrangements for the approval of excise warehouses. Miss Park said that she had seen this and that this letter does not refer to commercial viability. However it does state:

"You must only approve the warehouse for an initial period of 12 months. Within that time, preferably after three months you must review the working of the approval and the trader's compliance with the conditions of the approval. You may then add or vary the conditions, as necessary, before confirming the approval.

"If you consider that, even with additional security, the approval is still risky you must refuse the application."

Miss Park claimed that she did not consider it relevant that the approval would only be for a period of 12 months. She had discounted imposing additional security, despite Mr Macleod informing her in his e-mail that it would be possible to impose conditions and financial guarantees. Although Miss Park had no experience with letters from banks, she was prepared to say that she did not consider the letter from HSBC was sufficiently precise to be accepted as an offer of funds. She had not considered the difference between imposing a security requirement on the personnel or on the premises. She claimed not to have been told by Mr Rivers that if the business were not profitable enough initially, then he would defer repaying the guarantee. In cross-examination Miss Park was asked whether she understood the concept of proportionality, and it was apparent from her answer that she did not.