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No longer a shrinking violet

Category Technical Articles
AuthorTechnical Department
Excise Duty is in the limelight: Article by Gavin McFarlane FTII, a barrister in Temple Chambers, Cardiff. He writes widely on international trade, excise and customs matters. This article appeared in the December 2002 issue of Tax Adviser.
Not many years ago, excise duty was considered a rather unusual area of taxation, even among those practising in indirect taxes. Even within the department of Customs & Excise itself, there were very few specialists inside the legal office. Occasional large frauds in the oil industry were to be found in the crown courts, but major civil disputes were very thin on the ground. Suddenly this image of rarefied detachment from the rest of the tax world has been stood on its head. Earnest leaders on the topic of excise duty have been appearing with increasing frequency in the broadsheets. The Sun has made the issue its front-page story for three consecutive days. How has all this come about?

The sudden change is due to a number of factors. For at least two decades, successive governments have attempted to shift the burden of taxation away from personal and corporate direct taxes, and on to indirect taxation. The rates of value added tax (VAT) being particularly sensitive, chancellors felt that they were able to load increases onto the excise duties without the same constraint. No doubt that was due to a public perception at one time that excise on road fuel, alcohol and tobacco inevitably went up every year in the budget, so that increases for a number of years did not attract the same media attention.

Not, that is, until the public discovered that increases of excise had far outstripped other areas of revenue collection. The introduction of the European single market had two significant consequences for excise. One was to reduce the amount of the chancellor’s take from customs or import duties, as these ceased to exist within the single market. The other was to create serious frictions between the low or nil rates of excise duties applied in particular to alcohol and tobacco in some of our neighbouring states in mainland Europe, and the increasingly high rates being imposed within the United Kingdom (UK). It is important to note that as part of this process, the European Community introduced Council Directive 92/112 on excise law, (the excise directive) and the UK purported to implement this by means of the Excise Duty (Personal Reliefs) Order 1992 (SI 1992/3155) (the Personal Reliefs Order). And at the heart of the current turmoil in excise law is the attempt in the Finance Act 1994 to extend so called civil penalties from VAT only, and for the first time to include excise. From this point, what had previously only been the VAT tribunals became the VAT and Duties tribunal, and decisions began to emerge on points of excise law.

Chance to lodge appeals

So from 1995 people returning from mainland Europe – disgruntled by the treatment they received from Customs – had the opportunity to lodge appeals to the tribunals against civil penalties imposed in respect of excise duty, and the terms on which restoration was offered – if offered at all – when the vehicles in which they had been travelling were seized by the department for alleged excise offences. From the outset it was clear that there were serious frictions between the ‘minimum indicative limits’ contained in the UK’s Personal Reliefs Order, and the guidelines for commerciality contained in the excise directive. Doubts began to be expressed about the proportionality of the penalties Customs were imposing But apart from a reference made in an early tribunal case called Hodgson (E0008, LON/95/8023), there was no serious attempt for some years to explore the relationship between the excise directive which had re-shaped community law on excise, and the Personal Reliefs Order which had attempted to implement it. Not, that is, until this year.

’Get Tough’ policy

At the end of February 2002, the Court of Appeal released its judgment in the case of Lindsay v C & E Commrs [2002] EWCA Civ. 267. The background to the case was that when the European single market had come into operation in 1993, the revenue lost each year as a result of the smuggling of excise goods was something between £30m and £40m. By the year 2000 this had increased sharply to around £3.8 billion on the basis of tobacco smuggling alone.

Faced with this drain on its tax revenues, the government through the agency of Customs had begun to impose an increasingly severe policy of seizure of the vehicles in which the goods were carried by travellers. In 2002 Treasury minister, Dawn Primarolo, announced the new ‘Get Tough’ policy. Even if the alleged offence were the first occasion on which a vehicle had been found to be employed for carrying goods over the UK’s minimum indicative limits, Customs having seized it would not offer it for restoration. Before the tribunal Mr. Lindsay had contested the right claimed by Customs to deprive him of his car, following its seizure when he had been stopped and found to be carrying a substantial quantity of cigarettes and tobacco. In the VAT and Duties tribunal it had been ruled that the decision not to return his vehicle to him had been disproportionate, and would involve him in undue hardship. Mr Lindsay had explained to the customs officers that he had purchased some of the excise goods for members of his family, with money which they had provided. The Master of Rolls analysed both European Union (EU) and UK legislation on the issue. He concluded that there was some confusion about what was meant by ‘goods held for a commercial purpose’ in the Personal Reliefs Order.

It was pointed out by Lord Phillips that the excise directive had made express provision for products acquired by private individuals for their own use, and for products which are held for a commercial purpose. It had not provided in terms for the instance of the private individual who purchases goods on behalf of others, but not in circumstances which would naturally be described as being as he put it, ‘for a commercial purpose.’ Lord Phillips cited the case of the tourist who purchases some cigarettes on behalf of and at the request of a relative who has furnished him with the money to do so. On behalf of Customs, it had been contended that if Mr Lindsay had bought cigarettes for members of his family, he was holding them for a commercial purpose, even though he was not going to make a profit from the transaction.

Commercial purpose

Lord Phillips said that he could not accept that a holidaymaker who was returning with cigarettes for his sister, in the expectation that she would reimburse him for the purchase price, could properly be said to be holding the cigarettes for a commercial purpose. There was in his view a very considerable difference between a man who was bringing cigarettes into England to distribute to members of his family against reimbursement, and someone returning to the UK with cigarettes in order to sell them at a profit. The fact that other members of his family were benefiting financially because the goods were cheaper than in the UK did not make the transaction ‘commercial’ within the normal meaning of that word. Otherwise that would have rendered Mr Lindsay’s purchase for his own use also commercial, said Lord Phillips.

But much worse was to come for the Customs interpretation of excise law in Hoverspeed and others v C & E Commrs [2002] EWHC 1630. At the end of July, the High Court in this decision in effect considered that successive UK governments and Customs had failed to appreciate the true nature of the European single market machinery for excise control. The judgment in seven key findings demolished the manner in which it had been previously administered. It found that:

  • Excise duty is only chargeable on alcohol, cigarettes and tobacco purchased by an individual in another member state of the EU when they are held in this country for commercial purposes, as opposed to being held by an individual for his own use.
  • The Personal Reliefs Order wrongly reverses the burden of proof by requiring the individual to prove that he is not holding excise goods over the minimum indicative limit for a commercial purpose.
  • If an individual holds excise goods in excess of the minimum indicative limit, this fact must be used solely as a form of evidence, and not as a persuasive presumption that he holds the goods for a commercial purpose.
  • There must be reasonable grounds for suspecting an individual of holding goods for a commercial purpose before he may be lawfully stopped and searched.
  • Individuals and their excise goods must on the face of it be free to travel across internal frontiers of the European Community without being impeded and delayed by checks for excise duty purposes, although such checks may be made where grounds of reasonable suspicion exist on an individualised basis.
  • Customs officers must follow principles of proportionality when determining whether or not to restore goods and vehicles they have seized to their owners.
  • Lord Justice Brooke found that in the case under consideration, because Customs had not explained to the court the reasons why they had stopped the appellant in his car, and because they had suggested in their evidence that they might stop passengers for legally inadmissible reasons, they had not proved to the court that there were reasonable grounds for stopping the car and questioning the occupants. The goods in the car should not have been seized, nor should the car. Lord Justice Brooke observed that the mindset of those responsible for determining these policies had not embraced the world of an internal market where excise goods can move freely across internal frontiers.

Since that finding by the High Court in the summer, a situation has built up which is almost unique, in the sense that according to widespread reports Customs officers are widely ignoring the findings of the High Court, apparently on the basis of instructions from management of the department, and seemingly supported by ministers. Travellers continue to complain of being stopped by Customs officers at ports, apparently at random, and of their being obliged to attempt to prove that the excise goods which they have purchased have not been bought for a commercial purpose. This would appear to be contrary to the finding of the High Court, that in these matters, the onus of proof falls squarely on Customs. And it is said that vehicles continue to be seized without restoration being offered, with no regard to proportionality. A further appeal by Customs is imminent, and will take place against considerable pressure from the European Commission. Having at the instance of aggrieved British citizens taken up on their behalf their complaints about the way in which Customs is administering excise, Commissioner Frits Bolkestein is implying that the United Kingdom could find itself having to justify its actions before the European Court of Justice if satisfactory explanations are not provided to the Commission. This is a drama which is unfolding rapidly. When the last act will be played out is still unclear, but it promises to be quite spectacular.

Technical Department
020 7235 9381

December 2002 by Gavin McFarlane


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