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Scales of justice are out of kilter
January 2008
Mike Hodge, International Trade Today
Last year I was at a tax reception talking to a couple of chairmen of the VAT and Duties Tribunal. We got round to discussing the workings of the tribunal and I was asked why I thought so few Customs cases were heard. As I write this, there have been some 244 Customs cases heard in comparison to 23,000 VAT cases. Many of the VAT cases were concerned with late returns and other procedural matters, which do not affect the Customs side of the taxpayers’ burdens of misery.
Additionally, the VAT rate of 17.5 per cent is more in financial terms than the average Customs duty rates. Of course, antidumping duty and agricultural duties can pump this up but, generally speaking, duty is a lesser amount in terms of value. Also there are some two million VAT registered businesses and only about 20,000 international trade companies paying meaningful amounts of duty.
These reasons go part way towards explaining the disparity between the numbers of those cases.
There is, however, another reason – and that is one of costs. A graphic illustration of this can be seen in VAT and Duties Tribunal case C244, which can be found on the HMRC website.
In essence, Catering Services (GB) Ltd was said to have failed to comply with the EU’s documentary requirements regarding the claiming of a preferential rate of duty on sugar imported from India. The two post-clearance demand notes amounted to the best part of £110,000 and, when taken off the bottom line of any company, would have a fairly disastrous effect. The first C18 was issued on 19 March 2003 and the tribunal case was heard in London, on 11 October 2007. One first of all has to ask the question why on earth this dispute took three years to get to the tribunal?
The first consignment was imported early in 2003 (or before – the date of entry is not recorded) and the particular EU Regulation (2782/76) requires that ‘The importer of preferential sugar originating in India shall, in addition, submit to the Customs authorities of the Community a voucher duly endorsed by the competent authority of India. This voucher shall bear one of the following endorsements: Regulation (EEC) No: 2782/76 refers.’ I’m only recording what the judgement says – it doesn’t make sense to me either.
The entry was processed manually by Customs but the requirement for the endorsement was not pointed out to Catering Services. However, the importer did write to Customs at the end of April 2003 to say that it was attempting to obtain the required certificate from the Indian authority. It would seem from my reading of the case that Catering Services was not aware that this endorsement was ‘worth’ nearly £21,000 in Customs charges.
Three other consignments were then imported later in 2003 by which time Regulation 2782/76 had been superseded by Regulation 1159/03. Article 13 of this Regulation requires that ‘Import licence applications and licences shall contain the following entries… (a) in box 20, at least one of the following entries: – Application of Regulation (EC) No: 1159/2003, No:… (ACP-India preferential sugar No: 09.4321).’ Additionally, Article 15 of the same Regulation requires that a supplementary document has to be provided containing the same wording. In case you think I understand what Regulation 1159/03 is saying – I don’t.
Despite obtaining nearly all the required evidence, the importer failed in his task of obtaining the additional statements. Again, the consignments were manually cleared by Customs but the error was not pointed out to the importer.
At the tribunal, it was the importer’s contention that, as Customs had manually processed the first importation, it should have pointed out the error there and then. Also, no further consignments would have been ordered and imported; and, furthermore, it was unreasonable of Customs to charge £110,000 additional duty when the goods had long since been sold.
In the decision, the chairman confirmed that Customs did make an error within Article 220(2) of the Customs Code since the entries were processed manually and, therefore, were seen by Customs. However, the error Customs made ‘was reasonably detectable by a person reading the Official Journal’. This is a reference to a High Court ruling from the Honourable Justice Lightman (a few years ago now) where, effectively, he said it doesn’t matter how many mistakes the Customs authorities make, if the right answer is in the Official Journal, the importer is responsible for his own actions.
Within the world of VAT, this very harsh decision does not exist. There are a lot of cases concerning what is ‘a reasonable excuse’ and also a statement referred to as ‘The Sheldon Principle’. I have mentioned this in previous articles. In basic terms, it says that if Customs makes a decision being in full knowledge of the facts, then the trader has a defence under Sheldon. However, this applies only to VAT.
Now, in the case of Catering Services, one could say that because the importer knew he had to get the endorsements, then the error was his own fault. I don’t think it’s quite as simple as that. I think Customs has a duty of care for its ‘customers’ – as they like to call us. It could and should have provided more help to the importer. The tribunal chairman said, ‘We have considerable sympathy for the appellants.’ But sympathy is not a lot of good when £110,000 is at stake.
The real point of this article is that HMRC was represented in the tribunal by Mario Angiolini, counsel, who had himself been instructed by general counsel and there was a Customs solicitor there, too. The importer was represented by a director and his friend! At the end of the judgement, the tribunal chairman records: ‘In a letter of 30 April 2007, Customs warned the appellant that, if successful, they would ask for costs…we award Customs the costs.’ I personally think ‘threatened’ would have been a better word than ‘warned’. So, what on earth has all this cost the battered importer – another £50, maybe more?
The tribunal was, I thought, set up so that traders could have their case heard in a ‘relaxed’ and generally inexpensive court. It is to be noted that HMRC does not go for costs in VAT and Excise cases so why does it need to do this for Customs disputes? This is actually why there are so few Customs cases – we have the Lightman ruling that says if the right answer is in the Official Journal, the importer is at fault and then there is the added financial strain of having to pay costs while Customs employs counsel using taxpayers’ money. Then it pursues costs!
There might, however, be a very small chink of light in that HMRC has just issued a Consultation Document on the workings of all of its tax appeals mechanisms. There is a proposal that ‘as many disputes as possible are resolved informally, without the expense or anxiety of a hearing’.
This would be a real step forward if the appellant could meet the HMRC review officer and the Customs solicitor to go through the various arguments. The result that the consultation and review is seeking is that when a taxpayer objects to an HMRC decision there is a period for discussion and negotiation in which agreement could be reached.
Only after these avenues are exhausted would the case go forward to the tribunal. Interestingly, the consultation paper is silent on the matter of costs – the payment of interest is covered in some detail but costs are not mentioned. One can only assume that the question of costs are relevant only to Customs cases. But why is this?
So, the Consultation Document is available on the HMRC website and I hope that importers and exporters give HMRC feedback. The tribunal system, in so far as it relates to Customs cases, is not fair to those who have the Official Journals ruling to contend with as well.
