Greenalls Management Ltd. v Customs and Excise

The issue in the present case is whether a warehouse keeper is liable to the Commissioners for excise duty on goods which have left his warehouse under duty suspension arrangements applicable to goods delivered for export to a member State of the European Union but which, in breach of those arrangements but without the involvement of the warehouse keeper, are then made available for consumption in the United Kingdom.

The facts as agreed between the parties were as follows.

The Manchester VAT and Duties Tribunal accepted the submissions of the Commissioners and held that Greenalls were liable to pay excise duty on the goods. Greenalls appealed to the High Court maintaining that they were not liable. Jacobs J held that he did not have sufficient facts to come to a conclusion on liability and sent the case back to the Tribunal. Both sides appeal to this court.

Duty is in principle levied on spirits manufactured or imported here. S.5 of the Alcoholic Liquor Duties Act 1979 as amended provides:-

The answer to those questions is to be found in the Excise Goods (Holding, Movement, Warehousing and REDS) Regulations 1992 (“the Regulations”) which came into force on 1 January 1993. They were made following the coming into force of Council Directive 92/12/EEC (“the Directive”) and the Finance (No.2) Act 1992. The Regulations indicate that the rate of excise duty shall be that prevailing at the excise duty point. They go on to provide who is to be liable to pay that duty and when he is obliged to pay it.

Excise duties in this country go back for centuries. They used to be dealt with exclusively by the United Kingdom. However, since we joined the European Community they have also taken on a Community aspect. The Member States considered that, in order to ensure the establishment and functioning of an internal market, chargeability of excise duties should be identical in all Member States. Yet, they have so far not yet been able to agree on what the rates of duty should be.

Nevertheless, they agreed upon the Directive which obliged Member States to bring into force by 1 January 1993 common procedures pursuant to which it is possible to determine which State is entitled to the excise duty in the case of goods passing between them. This regime involves the fixing of an excise duty point. Broadly speaking, the State on whose territory the excise duty point is reached is entitled to the duty. The Directive provides for duty suspension arrangements pursuant to which it is possible to move goods prior to the advent of the excise duty point. In particular, the Directive provides that the goods can be kept in authorised warehouses and moved subject to certain conditions which include being accompanied by AADs. Thus, in principle, goods can be made in the United Kingdom and exported to a Member Country without duty being payable in this country. However, provision is made for duty to be payable to the authorities of the importing country.

The Directive provides that excise duty shall become chargeable at the time of release for consumption and that this phrase shall include any departure, including an irregular departure, from a suspension arrangement. The Directive provides in Article 13 that an authorized warehouse keeper shall be required to provide a guarantee “to cover movement” and in Article 15(3) that “the risks inherent in intra-Community movement shall be covered by the guarantee provided by the authorised warehouse keeper of dispatch as provided for in Article 13, or, if need be, by a guarantee jointly and severally binding on both the consignor and the transporter“. What seems to be envisaged is that the State which is entitled to the duty should be able, if need be, to call on the guarantor to provide the duty to which it is entitled. However, for reasons with which we are not familiar, in the present case the Commissioners do not sue on any bond.

So far as goods manufactured in the UK are concerned the Regulations make provision for duty suspension arrangements. These postpone the excise duty point. Whilst such arrangements are in place in relation to any excisable goods the person who would otherwise be liable to pay the duty is not liable to pay it because the excise duty point has not yet arrived. The Regulations envisage that the suspension will in due course come to an end and the excise duty point is fixed at this stage. Sometimes that will be in this country. Sometimes it will be abroad in one of the Member States of the European Union. In the former case the duty is payable to the Commissioners; in the latter it is payable to the authorities of the relevant member State. Sometimes, of course, the goods will go to countries outside the Union but we are not concerned with that situation.

With that introduction it is possible to turn to the relevant provisions of the Regulations:-

It is common ground that at some point after they left Greenalls’ warehouse the goods left the duty suspension arrangement because they were dealt with in a manner contrary to that arrangement. In the Regulations there is no express provision in clear terms as to what is to happen if the goods are diverted after they lawfully leave a warehouse bound either for another warehouse or for export. Hence the present problem.

My sympathies are with the judge. He said:-

The judge read into Regulation 4(2)(a) the words which I emphasise “… made available from the warehouse for consumption ”. He held that he did not have enough information to enable him to decide whether there was any irregularity at the point when the goods left the warehouse and therefore remitted the matter to the Tribunal to make the appropriate findings.

The only guidance given by him as to what was an irregularity is contained in paragraph 28 of his judgment where he states “One might perhaps infer, as in Hayward [1998] EWHC Crim 1898 they were inappropriate documents and accordingly an irregularity then”.

The course adopted by the judge was one which we understand neither party had urged upon him and which neither party sought to sustain in front of us. There is no suggestion that the AADs were not, on the face of them, in order when the goods left the warehouse. It seems that what happened in the present case was that, after the goods had left the warehouse, a false stamp was applied to the documents which purported to show that the goods had arrived in Spain although in truth the goods had been sold in England. For the same reason, the decision of the Court of Criminal Appeal in Hayward is distinguishable, although the facts were in some respects similar. As I read the judgment, it proceeded on the basis that the AADs were “deliberately falsified in a number of important respects by the appellants or others at their instigation”, and were therefore vitiated from the outset.

I would accept that here the judge fell into error and that he had enough material to enable him to resolve the dispute. Difficult as that resolution undoubtedly was, the difficulties did not arise from any obscurities as to the factual situation, although undoubtedly there were such obscurities.

The primary submission of the Commissioners runs as follows:-

I accept that when the goods left the warehouse they were delivered for export and I accept that when they were diverted and sold in the UK they ceased to be subject to suspension arrangements. But although I see the force of the Commissioner’s primary submission I would not accept it.

The Regulations were made under section 1(4) of the Finance (No 2) Act 1992 which envisages that the person liable to pay duty must have a prescribed connection with the goods at the excise duty point.

It seems to me that Regulation 5(4) was not intended to impose liability on a warehouse keeper in circumstances where he is utterly blameless and no longer has any connection with the goods.

On the contrary, the phrase “were made available for consumption” in Regulation 4(2)(a) was, as can be deduced from Regulation 5(4), designed for circumstances in which the warehouse keeper was responsible for the making available of the goods for consumption rather than merely responsible for the making of a further transfer under duty suspension arrangements.

This does not leave the Commissioners without a remedy.

So far as the European Union is concerned, in circumstances where the goods originate from this country and do not leave it then, as things currently stand, no liability to duty to any other Member State arises.

Problems of this kind were intended to be dealt with by the provision of a bond equivalent to the amount of the duty from the owners, transporters, or indeed the warehouse keeper - see Customs and Excise Management Act 1979 section 53(5), Regulation 10 of the Regulations and Regulation 16 of the Excise Warehousing (Etc) Regulations 1988. Where such a bond is required of the warehouse keeper then he will make the appropriate financial arrangements with his customer. Where no such security is required of the warehouse keeper then the Commissioners must look to others for the payment of duty.

It is relevant to note that in circumstances such as the present where the warehouse keeper has lawfully permitted goods to be taken from a warehouse and those goods are later without his knowledge diverted, the Customs and Excise Management Act 1979 sections 94 and 95 impose liability on the owner but expressly exempt the warehouse keeper.

It seems to me that even if Regulation 5(4) can be read as imposing liability on a warehouse keeper in circumstances such as the present, it need not be so read and should not be so read. This is because of the principle accepted on behalf of the Commissioners that if a tax is to be imposed it should be done in clear language - as was subsequently done by Regulations 3 and 7 of the Excise Duty Points (Duty Suspended Movements of Excise Goods) Regulations 2001;

Although, as is accepted by all parties, the Regulations ought to be construed so as to be consonant with the Directive if possible, that principle is of no assistance to the Commissioners in the present case. While the Directive makes clear that the duty excise point arises when there is a departure from a suspension arrangement, it gives no direct instruction that the warehouseman is to be made liable in circumstances such as the present. Indeed, if anything Article 20, which states that where an irregularity has been committed in the course of a movement involving the chargeability of excise duty the duty shall be due from the person who guaranteed the payment of the duty, points against the warehouseman being liable in the present case. What, from the Commissioners’ point of view, has gone wrong in the present case is that they apparently allowed the goods to be moved without first obtaining the guarantee which both the Directive and the Regulations envisage should be obtained. That is not the fault of Greenalls.

For those reasons I would reject the Commissioners primary submission.

The Commissioners had an alternative submission which was framed thus in the written submissions placed before the court.

We endeavoured to tease out at the hearing precisely what was being submitted here and what was its relevance to the present case. I confess I had some difficulty in understanding the point. In so far as I (and, so far as I can see, the judge) understood the submission it was that where others were liable the warehouse-keeper could be made liable jointly and severally with them even though the case did not fall within Regulation 4(2)(a). Like the Judge, I would reject this alternative submission.

I would therefore allow the appeal by Greenalls and dismiss that by the Commissioners.

I agree that Greenalls’ appeal should be allowed, substantially for the reasons given by Schiemann LJ. However, since I have shared his difficulty, and that of the judge, in extracting any sensible meaning from the regulations, it may be helpful if I describe my own more laborious journey to the same conclusion.

We have to proceed in this case on the factual basis that:-

The goods left Greenalls’ warehouse with an accompanying document which on its face, and in the belief of Greenalls, complied with Regulation 10.

That the Commissioners are not able to rely on the terms of any bond to enforce liability.

That after leaving the warehouse (at a time which has not been determined) the goods became available for consumption in this country through no fault of Greenalls.

The problem is to apply the law to this set of facts. Unlike VAT, Excise Duty is not a European-based tax. It is a domestic tax, which has had to be adapted, along with similar taxes in other member states, to make it compatible with the single market, introduced at the beginning of 1993. This was achieved by Council Directive 92/12/EEC (“the Directive”) which was given effect in English law by the Finance No.2 Act 1992 (“the 1992 Act”) and the Excise Goods (Holding Movement Warehousing and REDS) Regulations 1992 (“the 1992 Regulations”). The main problems in the case arise from the unusually inept drafting of the 1992 Regulations.

It is convenient to begin by considering how the above facts would have been treated under the law prior to the 1992 changes. The relevant law was consolidated in the Customs and Excise Management Act 1979 (“CEMA”). Sections 94 and 95 deal respectively with “deficiency in warehouse goods” and “deficiency in goods occurring in course of removal from warehouse without payment of duty”. The former applies to warehouse goods before they are “lawfully removed from a warehouse in accordance with a proper clearance thereof”. The latter applies where goods “have been lawfully permitted to be taken from a warehouse without payment of duty for removal to another warehouse or to some other place…” Under section 94, the occupier of the warehouse and the proprietor of the goods are both liable for duty in the absence of a valid explanation of the deficiency. Under section 95 only the proprietor is liable. Accordingly on the assumed facts Greenalls would not have been liable under CEMA, standing alone.

Article 6 (1) of the Directive was designed to establish the point in time at which the excise duty becomes actually chargeable, but not to determine the person from whom the duty should be claimed. This was explained by the ECJ in G van de Water v Staatssecretaris van Financien Case 325/99 (5^th April 2001). It was made clear that the Directive was not seeking to harmonise the procedures for the levy and collecting of duty by the states, which were left to the member states to determine. On the other hand, although the Directive did not specify the person liable, it followed from the scheme of the Directive “that the national authorities must in any event ensure that the tax debt is in fact collected” (para 40-41).

Article 6 (1) provides that excise duty “shall become chargeable at the time of release for consumption…” It continues:-

any departure, including irregular departure, from a suspension arrangement;

any manufacture, including irregular manufacture, of those products, outside a suspension arrangement;

any importation of those products, including irregular importation, where those products have not been placed under a suspension arrangements.”

Only a) is relevant in the present case. A suspension arrangement is “a tax arrangement applied to the production process and holding and moving of products, excise duty being suspended”. By 6(2) the conditions and rates of charge are to be those in force on the date when the duty becomes chargeable in the member state where a release for consumption takes place.

In the Waters case the ECJ explained (a) as a clear indication that:-

Before leaving the Directive, it is also relevant that provision is made for excise duty to be recovered in circumstances where an irregularity has been committed “in the course of a movement involving the chargeability of excise duty” (Article 20). However, in that case the liability falls on the person “who guaranteed payment of the excise duties in accordance with Article 15 (3)” (see Art 20(1)). That is a reference back to Article 15 (3), which requires “the risks inherent in intra-community movement” to be covered by a guarantee by the authorised warehouse keeper. No such guarantee is relied on by the Commissioners in this case, and it is not suggested that the apparently mandatory requirements of Article 15 (3) can be relied on by them against Greenalls. If anything, in my view, this provision points against there being direct liability on a warehouse keeper in the absence of such a guarantee.

The Directive was given effect in English law by the 1992 Act and the 1992 Regulations. The need for a new Act (rather than reliance on the European Communities Act 1972) is no doubt explained by the fact that the Regulations needed to go beyond the scope of the Directive, by providing for liability for tax, as well as defining the time when the charge arose. However, in construing the Act and the Regulations, it is in my view important to distinguish between the two elements: that is, the definition of the excise duty point, which was derived from the European Directive; and the imposition of liability, which was not.

These two elements were reflected in section 1 of the 1992 Act. Section 1 (1) 1992 Act enabled the Commissioners to make provision by regulations -

Turning to the 1992 Regulations, article 4 defines the excise duty point. The general rule (art 4 (1)), subject to the following paragraphs, is that the excise duty point is “the time when the goods are chargeable for duty at importation”. Paragraph (2) which is relevant to the present case, deals with the case where “any duty suspension arrangements apply to any excise goods”. The excise duty point is the earlier of a number of alternatives (a) to (f). Those directly relevant here are –

The difficulty is to apply these rules to a case where the goods start out from the warehouse under lawful suspension arrangements; but are then diverted unlawfully within this country, for example if they are hijacked in the course of transit by third parties with no connection to the warehouse owner.

Under the Directive the position is reasonably clear. There is a “release for consumption” when there is “any departure, including irregular departure” from a suspension arrangement. If the goods are hijacked in the course of transit, that clearly constitutes an “irregular departure” from suspension arrangements. Accordingly, duty becomes chargeable at that point.

The position is much less clear under article 4 of the Regulations. At first sight, (a) seems concerned with delivery for home consumption, while (f) seems to be concerned with delivery to another tax warehouse or to export. One would accordingly expect to find the present case falling within (f), since it was for export that the goods were consigned when they left the warehouse. However, (f) contains no express provision to cover the case of an irregular departure in the course of transit for export. Where the goods are consigned to another approved warehouse in this country, it might be said (under (f) (i)) that at the point of the hijack the goods ceased to be “moved in accordance with requirements prescribed”. However, the same construction cannot be applied to (f) (ii), where goods are delivered for export.

The only way one can give effect to this aspect of the Directive is by treating sub-paragraph (a) as applying to any goods “made available for consumption” in this country, regularly or irregularly, and whatever their intended destination (regardless of any overlap with (f)). On this basis, it would extend to goods being made available for consumption in this country by unlawful action of a third party. It is surprising, if this had been intended, that there was not some specific reference to “irregular departure” as in the Directive; but, in order to give effect to the Directive, it may be appropriate to treat such words as implied.

However, before adopting such a reading, it is necessary to consider the implications that it would have for article 5, which deals with imposition of liability. Although we are directly concerned only with paragraphs (4) and (5), it is helpful to see them in context:-

The intended pattern, following section 1(4) of the 1992 Act, is apparent from paragraphs (1) to (3). In relation to imported goods, the importer is primarily liable. In his case the “prescribed connection” (within the meaning of the 1992 Act) is obvious, and does not need to be stated. Consistently with the statute, paragraphs (2) and (3) define other categories of connection, which will result in joint and several liability with the importer.

One would expect the same pattern to be followed in (4) to (6). The “prescribed connection” formula is indeed respected in paragraphs (5) and (6) in relation to liability other than that of the warehouse keeper. The prescribed connection is either ownership of the goods at the excise duty point, or having caused the goods to reach the excise duty point.

Under (4), however, in relation to the authorised warehouse keeper, the position is much less clear. The assumption seems to be that reference to paragraph (2)(a) will establish a “connection” as obvious as that of the importer with the imported goods (under paragraph (1)). That purpose is achieved, if as Greenalls submit, paragraph (2)(a) is confined to events occurring at or on leaving the warehouse. It is easy to see that the warehouse keeper has a “connection” with the goods at the excise duty point as so defined. However, if sub-paragraph (a) is construed as extending to subsequent events such as a hijacking in the course of transit, that obvious connection ceases to apply. The warehouse keeper has no direct connection with the goods at that point, and none is specifically prescribed. It might perhaps be argued that he is the person who caused the goods to reach that point, by consigning them to delivery for export (paragraph (5)). However, that paragraph clearly implies that the liability of the “person specified in paragraph (4)” (that is, the warehouse keeper) is distinct from that of the person who causes the goods to reach an excise duty point. (The same distinction is drawn between the importer and others who "cause" in paragraphs (1) to (3)(f)). Thus, it seems, the mere fact that he is the consigning warehouse keeper does not establish the relevant causation.

One is therefore faced with an apparently irreconcilable conflict. If one interprets paragraph article 4(2)(a) so as to give effect to the Directive, then one interprets it as including an unlawful hijacking in the course of transit. On the other hand, if one carries that construction through into article 5(4), it is impossible to reconcile with the enabling statute, since there is no prescribed connection at that point.

Faced with that dilemma, since chargeability is a matter of domestic law, I can only fall back on the basic principle of English law that a person is not to be subject to a tax other than by clear words. It is true that European law requires there to be some provision for the tax to be collected in those circumstances. However, that in my view is adequately covered by CEMA s 95 which makes the proprietor liable, as well as the provision which could have been made to establish liability by means of an appropriate guarantee, dealt with by other parts of the Regulations.

I also agree with Schiemann LJ’s reasons for rejecting the alternative basis of liability proposed under paragraph (5). Here again a comparison with the earlier part of the article is helpful. Liability on the importer is imposed by paragraph (1). Paragraph (2) is designed to impose liability on others with the identified “prescribed connections”, and to define the nature of the shared liability; not as a roundabout additional way of imposing liability on the importer. In the same way, in my view, if the authorised warehouse keeper is to be made liable, it must be under (4), not under (5).

In those circumstances I would hold that the Commissioners have failed to establish a lawful basis for the assessment. I would allow Greenalls’ appeal, and dismiss that of the Commissioners.

I find this appeal exceptionally difficult to resolve. The facts – actual or assumed – are of limited compass. So too are the Regulations. But they are far from clear. I understand that subsequent legislation has been enacted; presumably it either removes the difficulty or substitutes new problems. It is to be hoped that there are not many outstanding cases which may be affected by what we say.

Regulation 4(2)(f) refers to “the time when the excise goods leave any tax warehouse unless… (ii) the goods are delivered for export, shipment as stores, removal to the Isle of Man.” The judge concluded that this meant “delivered from the warehouse”, and I agree. He also took the view that it is necessary to look at what the warehouse keeper thought. Again I agree: the notion that goods are delivered for export implies, to my mind, that somebody intended export, and the somebody must surely be the warehouse keeper.

It follows on the assumed facts that the goods were delivered from the warehouse for export; exception (ii) in Regulation 4(2)(f) applies.

Next I consider 4(2)(a): “the time when the goods are delivered for home use from a tax warehouse or are otherwise made available for consumption, including consumption in a warehouse.” By the same reasoning I conclude that this does not apply to the present case: it was not the intention of the warehouse keeper that the goods be delivered for home use when he delivered them from the warehouse. Nor did he make them available from the warehouse for consumption. I regard the whole of 4(2)(a) as directed at the intent of the warehouse keeper in delivering the goods from, or in, the warehouse. It does not apply in this case.

I hesitate to go further and say when and by whom the duty was payable. That is the Commissioners’ problem, not ours. But I do not doubt that someone was liable. It was not, in my judgment, Greenalls in their capacity as a warehouse keeper. I agree with the order proposed by Schiemann and Carnwath LJJ.

That the appeal of the Appellant from order is allowed and the appeal of the Respondent’s from the Order is dismissed.

That the case be remitted to the VAT and Duties Tribunal in order that it should in accordance with the judgment of the Court of Appeal allow the appeals and quash the assessments

That the respondents do pay the costs of the Appellant of this appeal and of the hearings in High Court and the VAT and duties tribunal, such costs to be subject to assessment if not agreed

Leave to appeal to House of Lords refused.