Seabrook Warehousing Ltd. & Ors, R (on the application of) v HM Revenue and Customs

This appeal concerns the validity of the Excise Goods (Drawback) (Amendment) Regulations 2009 (SI 2009/1023) ("the Regulations"), which came into effect on 1 June 2009. The Regulations abolish entitlement to "drawback" for alcoholic liquors under warehousing for export arrangements ("WFE"). The drawback system provides for the repayment by the Commissioners for HM Revenue and Customs (“HMRC” or “the Commissioners”) of excise duty that has been paid on alcoholic goods in the United Kingdom released for consumption where the goods are to be exported to other member states of the European Union (“the EU”). Drawback under WFE refers to one kind of duty repayment arrangement.

The Claimants, who either operate bonded warehouses which receive, store and export goods under WFE, or are traders who export alcoholic goods to purchasers in other member states of the EU, claim that the Regulations are invalid on several grounds. They appeal the decision dated 16 July 2009 of Mr Kenneth Parker QC (now Parker J), sitting as a deputy High Court Judge in the Administrative Court. He refused permission for judicial review in respect of all but one of the grounds relied upon by the Claimants, and dismissed the claim for judicial review on the one ground for which he granted permission.

Alcoholic liquor is in principle liable to excise duty when it is produced in the United Kingdom or when it is imported: s.5 and s.36(1) of the Alcoholic Liquor Duties Act 1979 ("ALDA"). The obligation to pay the duty arises only when the alcoholic liquor passes the "duty point", which is usually when the alcoholic liquor is released for consumption: Article 6 of Council Directive 92/12/EEC of 25 February 1992 on the "general arrangements for products subject to excise duty and on the holding, movement and monitoring of such products" ("the Directive").

The duty point may be postponed if, following production, the liquor is held in “duty suspension” in premises registered with HMRC, and also if it is moved from such premises to an excise warehouse: section 41A ALDA and, in respect of beer, regulations 12 and 13 of the Beer Regulations 1993 (S1 1993/12228) (“the Beer Regulations”). In such a case, duty only becomes payable if and when the liquor leaves the duty suspension system, that is to say, when it is delivered from the excise warehouse: see, for example, regulation 15 of the Beer Regulations.

Alcoholic liquor produced in the United Kingdom may, therefore, be held either “duty paid”, where duty has been paid following production and where it has never entered into or has left the duty suspension system, or “duty suspended”, where it remains in the original production premises or is moved to or between registered premises and excise warehouses. Goods in duty suspension may be exported, either to other member states or to third countries, and United Kingdom excise duty does not in that event become payable at any point. The duty drawback system allows traders to claim repayment of excise duty on duty paid alcohol that is exported. The purpose of the drawback system is to prevent double taxation, that is to say, excise duty being paid both in the United Kingdom and in the country where the goods are consumed, and to allow the free movement of goods within the EU. For present purposes there are two types of drawback claim: direct export (“DE”), and WFE.

The DE arrangement, which follows Article 7 of the Directive, has been in operation from 1 January 1993, when the single market came into effect. Under that arrangement, where duty paid goods are exported, the Directive authorises reimbursement of the excise duty upon proof of the duty having been paid in the United Kingdom and of the goods having been received and duty paid, or secured, in the member state of importation. Where duty paid goods are exported to third countries, excise duty is repayable upon proof of the duty having been originally paid and of subsequent export from the EU.

WFE was introduced by the Excise Goods (Drawback) Regulations 1995 (SI 1995/1046) ("the 1995 Regulations"), which came into force 1 June 1995. It is an arrangement authorised by Article 22 of the Directive. Under WFE, traders may claim reimbursement of duty from HMRC where they have purchased duty paid goods, which they intend to export to another member state or to a third country, and they place them in an excise warehouse, of the kind operated by the First and Eighth Claimants, so returning the goods to duty suspension. The excise duty is reimbursed in that event before the goods are in fact exported. WFE has an obvious cash flow advantage over DE drawback. Under the latter the trader must fund the amount of excise duty which is comprised in the purchase price of the goods until the goods have been exported, foreign excise duty has been paid or secured and all the formalities have been completed. Under WFE the United Kingdom excise duty is repaid once the trader has formed an intention to export the goods, the goods have been placed in an excise warehouse and all the necessary formalities have been completed.

The Second to Seventh Claimants (“the Trader Claimants”) are small and medium size companies. They purchase alcoholic goods, mainly beer, not from the original producers, but from intermediary wholesalers. The commercial marketplace in alcoholic products in the United Kingdom operates in such a way that they are only able to purchase “duty paid” goods. The Trader Claimants say that their EU customers, however, are generally only interested in purchasing “duty suspended” goods. They say that, until the abolition of WFE, they were able to operate profitably in the following way. They purchased duty paid goods from the intermediate wholesalers with the benefit of price discounts given by the brewers to those purchasing duty paid alcohol. They placed the goods in an excise warehouse. The combination of the discounted price and the ability to reclaim tax under WFE meant that they were able to offer the overseas customer duty suspended stock at a lower price than the price for which the customer could purchase under a duty suspension arrangement with mainstream suppliers in the customer’s home country. An example given by the Claimants is that a crate of Carlsberg Special Brew lager is, once United Kingdom duty is discounted, some £3 per case cheaper when purchased duty paid as opposed to being purchased under a duty suspension arrangement. The overseas EU importer does not need to account for duty in its home country until the alcohol is removed from the EU bonded warehouse for consumption.

In June 2006 HMRC carried out a consultation on proposed changes to excise duty drawback in respect of goods under the WFE arrangement.^. Paragraph 1.1 of the consultation document said that over the previous year there had been a marked increase in the warehousing of beer and spirits for export, often for very short periods; HMRC was not aware of any clear commercial rationale for that and was concerned that, given the relaxed evidence requirements then applying to WFE drawback claims, that could represent a fraud risk and a threat to the livelihood of compliant traders.

The consultation document suggested two options for reform, namely, abolishing the WFE scheme (Option A) and extending the period in which the goods would be available for inspection by HMRC, after a notice of intention to claim drawback had been submitted and before the goods could be removed from the warehouse for export (Option B). The advantage of Option B was said to be that it would allow HMRC more time to “undertake assurance activity on high-risk movements”. The consultation document asked consultees five specific questions about Option A, with a view to gathering relevant information about, among other things, the likely benefits and costs of the abolition of WFE.

Those questions were:

“1.

If you currently use the WFE option, what are your commercial reasons for doing so?

2.

To what extent would Option A affect your business?

3.

Would Option A result in increased costs for your business (please provide an estimate of that cost ‘per annum’ and the basis of the estimate)?

4.

If already registered with HMRC as an owner of goods in a warehouse with the facility to purchase duty suspended goods, why do you deal in duty paid goods?

5.

Do you have any other comments on Option A?”

The consultation document was distributed through the internet on HMRC's webpage and was advertised in "Excise News", a publication sent to all relevant trade associations and warehousekeepers. Hard copies of the consultation document were also sent to most, if not all, traders who had made drawback claims. HMRC received written comments on the consultation from 24 respondents, including trade associations and individual businesses. They included the Second and Third Claimants.

The responses were summarised in a document (“the Responses Summary”) which was published with the 2007 Budget. In the light of those responses, HMRC decided not to abolish WFE for the time being, but rather to impose more rigorous evidential requirements on those making claims for drawback. Under the heading “Conclusions”, the following was stated:

“3.5

Given these planned clarifications to HMRC guidance, the Government has decided that, at this stage, it will not proceed with either of the options for changes to the WFE regime outlined in HMRC’s consultation paper of June 2006. It will, however, continue to monitor closely the level of excise duty drawback claims and to carry out detailed assurance work to ensure that drawback claims are valid in all respects.”

HMRC set out new guidance in the March 2007 Budget edition of Excise News, and produced in June 2007 a revised version of Notice 207 (Excise Duty: Drawback), and wrote to drawback claimants about the changes. In that edition of Excise News HMRC stated:

"HMRC continue to monitor the usage of the drawback system closely, and although we are not taking them forward at this time, options for further reform remain under review, including the Government's lead option in the consultation – abolishing the warehouse for export provisions."

The same statement was contained in a standard form letter sent by HMRC on 21 March 2007 to all drawback claimants explaining the outcome of the consultation.

WFE drawback claims amounting to £18 million were made between May 2006 and October 2006. Following the introduction of stricter evidential requirements, the amount of claims for the same period in 2007 fell to £8 million. For the fiscal year 2008/2009, however, total drawback paid in respect of beer had increased very substantially to £54.49 million, of which £48.14 million was paid under WFE. Between 2005/2006 and 2008/2009 the increase in WFE drawback claims in respect of beer (£28.02 million) represented nearly 99 per cent of the increase in total drawback claims (£28.34 million) in respect of beer.

In April 2009 an Impact Assessment on a proposal for the removal of WFE drawback was presented by HMRC for the consideration and approval of the Minister (“the IA”). Under the heading “The Issue” the IA said:

“1.

The drawback system allows businesses to claim repayment of excise duty on duty paid alcohol that they destroy, export or warehouse for export (WFE). The largest proportion of repayments relates to beer WFE and in the past year there has been a sharp increase, with claims more than doubling (from £21m to £53m) compared with the same period last year. We believe these increases are substantially linked to fraud, and that duty losses may well be as high as £25m in 08/09 – of a projected £70m duty we expect will be claimed on all alcohol intended for export. In the absence of a robust regulatory response to this threat, it is feared losses may rise as high as £40m in 2009/10. The fraud itself bears some of the hallmarks of VAT MTIC fraud, with claimants sourcing alcohol from lengthy complex supply chains containing occasional missing traders. This has hampered HMRC’s ability to establish the eligibility of goods for drawback.

2.

We consulted formally with businesses on reform of the drawback regime in 2006 and in particular on withdrawing WFE (a summary of the responses to this consultation is available on the HMRC website). We were eventually persuaded, at that time, by arguments that fraud-related problems could be contained by applying more rigorous evidence of UK duty payment. However, we undertook to continue to monitor the drawback system closely and stated, in supporting documents published at Budget 2007, that options for further reform would remain under review, including abolishing the WFE provisions.

3.

After a measure of initial success, the changes we made proved to be ineffective as fraudsters found ways to circumvent the more rigorous evidence requirements. We have therefore concluded that, in its present form, the drawback system is inherently risky and the only way that we can make a real impact on drawback-related fraud is through regulatory change, the aim of which is to design out two risks that the WFE system presents:

(i)

claims for drawback on goods that were never duty paid in the first place; and (ii) the re-entry – via WFE – of goods into the duty suspension system that are later diverted onto the UK market without payment of duty.

4.

In line with what we said in 2007, we believe it is now necessary to go ahead and remove the WFE provisions. As an alternative, businesses will be able to use the ‘direct export’ drawback scheme where UK duty is repaid only after evidence of duty payment in another EU Member State. We acknowledge that this will place certain additional requirements on businesses that were brought to our attention in the 2006 consultation exercise. In response to this, where possible, HMRC will work with legitimate businesses to make the operation of the direct export scheme as straightforward as possible.”

The IA stated that the objectives and intended effect of the proposed change were:

“1.

to have an immediate and substantial impact on fraud including the risk of claims being made on non-eligible goods and the onward diversion of WFE goods re-entered into the duty suspension system

2.

to reduce unfair competition in the SME [small and medium enterprises] wholesale sector

3.

to contribute to the reduction of losses from alcohol fraud.”

The IA said that the impact estimates were based on the following assumptions:

“ The average monthly level of beer WFE drawback claims by SMEs for the period May 2007 to October 2007 represents the legitimate business need for beer WFE drawback from SMEs.

•

All drawback claims other than beer WFE claims by SMEs are legitimate.

•

If the measure is introduced, all businesses making legitimate WFE claims will continue to make the same average monthly number and value of claims using the direct export drawback regime.”

In paragraph 11 of the IA it was said that, on those assumptions, around 2000 claims from 50 businesses would be affected, with the total value of those claims being around £30 million; and that the assumptions were more likely to overstate the level of legitimate WFE drawback claims than to underestimate it.

In relation to costs, the following was said:

“13.

HMRC has identified the following costs to legitimate trade.

•

Additional administrative burden of direct export drawback claims compared to WFE.

•

Delays in receipt of payment for the claim due to the requirement of proof of export and foreign duty payment.

•

One off costs of changing business operating systems.

14.

The above costs were identified through the consultation exercise. No other significant costs were identified.

15.

HMRC has estimated the additional administrative burden using its standard cost model which provides estimates of the costs to business associated with its administrative processes. The net additional annual administration cost associated with the change to direct export drawback for legitimate claims is estimated to be around £3000 at current prices.

16.

The estimated cash flow costs assume a delay of 14 days and annual interest rate of 3.5%. This gives rise to an estimated annual loss of interest of £43,000 on legitimate claims (£30m).

17.

Together these give rise to an estimated total annual on-going cost of £0.04m.

18.

HMRC has been unable to quantify one off costs of changing business operating systems because the consultation responses provided no quantitative information on which to base these estimates. However HMRC expects these to be low because 75% of those businesses who currently make use of WFE drawback already also use the direct drawback regime and the total number of businesses affected is small (around 50).”

The following was said under the heading “Specific Impact tests”:

“Competition assessment/ Small firms Impact test

22.

The main beneficiaries of these changes will be SME UK wholesalers and retailers trading legitimately in the UK market. It should reduce unfair competition for those businesses currently competing with black market traders thus creating a level playing field. We estimate that the retail value of trade expected to transfer to legitimate businesses will be £60 million in the first year.

23.

For legitimate businesses currently operating WFE there will be an impact but we judge that this will be marginal for most businesses for which WFE is not a core business activity. As an alternative, businesses will be able to use the ‘direct export’ drawback scheme where UK duty is repaid only after evidence of duty payment in another Member State. Although inherently more secure from a revenue point, this system does place certain additional requirements on businesses. HMRC will work with them, taking a pragmatic approach, to make it as simple to work as possible.”

The IA included a statement that the position would be reviewed within two years of the abolition of the WFE drawback arrangement in order to establish the actual costs, benefits and achievement of the change.

On 6 April 2009 the Minister signed an acknowledgement at the foot of the first page of the IA that she had read the IA and was satisfied that, given the available evidence, it represented a reasonable view of the likely costs, benefits and impact of the leading options.

In the 2009 Budget (22 April 2009) the Government announced that WFE drawback would be withdrawn with effect from 1 June 2009. The IA was published with the Budget announcement.

The Regulations, which were laid before Parliament on 22 April 2009 and came into effect on 1 June 2009, gave effect to that decision by amendment of the 1995 Regulations.

The text of the relevant statutory provisions and the Regulations is set out in the judgment below. There is no need for me to repeat those provisions again.

The Claimants contended before the Judge that the withdrawal of drawback under WFE arrangement would have a devastating effect on their businesses, and that it was unlawful for the following reasons. First, the decision was taken without consultation with those affected, in circumstances where fairness demanded that such consultation take place. Secondly, it failed to take into account highly material considerations, in particular relating to (a) the commercial impact of the abolition of WFE drawback on many businesses such as those operated by the Claimants; (b) the factors that led to the recent increase in WFE drawback claims; and (c) whether the new regime would in fact serve to reduce any fraud. Thirdly, it was irrational. Fourthly, it was contrary to Community law.

The Judge granted permission to proceed with the claim for judicial review on the second of those grounds, but then dismissed the claim on that ground. He refused permission on the remaining grounds.

On this appeal the Claimants have consolidated into three grounds the four grounds relied upon by them before the Judge. Those three grounds are as follows. First, the Judge ought to have found that HMRC failed to take into account relevant considerations, in particular the commercial impact of the abolition of WFE drawback on businesses such as those of the Claimants. Secondly, fairness required that a further consultation take place to allow interested parties the chance to explain what had led to the significant increase in WFE claims since the 2006 consultation and why it was not attributable to fraud. Thirdly, Community law required that HMRC adopt a proportionate solution to the perceived problem of fraud, but the abolition of WFE drawback was not proportionate. The Claimants seek permission to apply for judicial review on the second and third of those grounds (corresponding to the first, third and fourth grounds before the Judge), and for quashing and declaratory orders in respect of the Regulations and damages for breach of Community law.

The Regulations were made by the Commissioners in exercise of powers conferred by s.2 of the Finance (No. 2) Act 1992. The Commissioners, therefore, plainly were relevant decision-makers for the purposes of the Claimants’ challenge to the legality of the Regulations. In addition, the Minister played a material role in the making of the Regulations since she was instrumental in the process leading to the laying of them before Parliament. Both sides were content to proceed before us on the basis that both the Commissioners and the Minister were relevant decision-makers. The Claimants’ principal submission is that the impact on businesses of the abolition of drawback for WFE was plainly a highly significant factor affecting the merits of the decision, but neither the Commissioners nor the Minister took it properly into account. It had been identified by HMRC in the 2006 consultation as an important consideration. Paragraph 1.2 of the consultation document said that: “HMRC’s objective is to introduce changes to the excise duty drawback system that:… do not increase burdens on compliant low risk businesses.” One of the five questions asked of consultees was : “To what extent would Option A [abolishing the WFE arrangement] affect your business?”

The 24 respondents to the 2006 consultation represented 6% of all drawback claimants in 2005/2006 and about a third of all persons using the WFE regime. Some of the respondents to the consultation said that the withdrawal of drawback under WFE would have a very serious impact on their business. A letter written on behalf of Huntingwood Trading Limited, for example, said that “the impact on the quite clear legitimate trade would be so dramatic as to make it unviable commercially.” Another respondent said that the abolition of the WFE drawback arrangement “would have a serious negative effect to the business in general.” The British Beer and Pub Association (“the BBPA”), a trade body representing the interest of the producers of 98% of beer brewed in the United Kingdom and operators of 60% of public houses in the United Kingdom, said that, without the WFE scheme, some companies would be unable to satisfy a number of orders to EU customers, and that DE drawback was not a viable alternative. It explained why that was so as follows:

“Firstly, the customer may wish to hold the goods in duty suspension in their tax warehouse. Some member companies EU customers only purchase duty suspended stock. Secondly, the customer may not want to pay duty in his state for goods that he has yet to receive, both for cash flow reasons and also because he may not want to get involved in the administrative burden this scheme entails. Finally, the bureaucracy associated with the direct dispatch creates a significant delay, certainly greater than that for the current WFE scheme.”

Acknowledging such negative reactions, the Responses Summary included the following statements:

“2.7

Although neither option was favoured by the majority of respondents, Option A was the least preferred option of the two, with only one respondent supporting this proposed course of action. All but one of those respondents that currently utilised the WFE system for drawback felt that this would have a significant negative impact on their business, both in terms of cash flow and their ability to compete with larger companies. The one respondent in support of this option felt that it would remove an easy source of illegal revenue for fraudsters, which could be used to further finance the illegal trade in alcohol.

2.9

A number of respondents explained that customers in other EU member states often preferred to receive goods in duty suspension. However, the removal of the WFE option would mean that there was no means for goods on which UK duty had been paid to be sent in duty suspension to a tax warehouse in another Member State, as the 'direct dispatch' system requires proof of duty payment in the Member State of destination before drawback can be paid. This, it was claimed, would restrict trade within the EU and be anti-competitive, and could result in alcohol being sourced from outside the UK, having an impact on the UK economy.”

The problem identified in paragraph 2.9 of the Responses Summary has been amplified by evidence and submissions in the present proceedings. The Claimants emphasise, for example, that there is a demand from French customers to purchase on a duty suspended basis because there would be no obligation to pay the duty unless and until the goods are removed from their warehouses in France for consumption there and also because the French customer may wish to sell on under bond; whereas, under the DE system, duty would have to be paid in France up front or be guaranteed and certified as having been paid; and if the French customer wanted to sell on under bond, they would need to make their own drawback in France with all the administrative and other complications involved.

The Claimants say that the IA is the best indication of what the Commissioners and the Minister had in mind when approving the Regulations since there is nothing to suggest that they personally saw anything else to inform them of the merits of the Regulations. This has not been challenged by HMRC. The Claimants further submit that the IA completely failed to address the evidence that withdrawal of WFE drawback would result, or would very likely result, in the loss of cross-border business for legitimate traders, such as the Claimants, not simply because of increased administrative costs, but rather because it would prevent them from satisfying a demand from their EU customers for goods supplied under duty suspension. They point to the “express assumptions” in paragraph 10 of the IA, and in particular the assumption that all businesses making legitimate WFE claims would continue to make the same average monthly number and value of claims using the DE drawback regime; and to paragraph 23 of the IA which said that the impact on legitimate businesses currently operating WFE would be marginal for most businesses for which WFE was not a core business activity and that businesses would be able to use the DE drawback scheme as an alternative. Paragraphs 13 to 18 of the IA (quoted above) identified three heads of costs to legitimate trade, which were said to have been the only significant costs identified in the 2006 consultation, but they did not include the loss of business as described above.

The Judge accepted that the IA indicated that HMRC did not consider that the abolition of WFE would have a significant impact on business. He considered, however, that the position taken by HMRC was legitimate since the alleged impact was highly speculative and not capable of reliable quantification. He said:

“37.

It does appear, therefore, that in making the impact assessment HMRC did not proceed on the basis that, if WFE were abolished, legitimate cross-border supplies of beer would be significantly reduced or that revenues from such supplies would be significantly lower. HMRC, therefore, discounted the matter under consideration.

38.

Although it might have been preferable if HMRC had specifically addressed this matter in the Impact Assessment, the relevant legal issue is whether the failure to do so and the implicit rejection of the point in question vitiated the decision to abolish WFE. In my view, it did not. On an objective analysis the alleged impact was highly speculative and, on the information available, not capable in any event of reliable quantification, for the following reasons.”

The Judge gave his reasons in paragraphs 39 to 45 of his judgment. He said that there were, in fact, very substantial drawback claims made under the DE arrangement; the point in question had not featured strongly in the responses to the 2006 consultation; it was unclear how much trade might be affected in the manner alleged, and what the precise impact might be; without some reliable estimate of the costs, he could not see how the economic impact, if any, could sensibly have been evaluated; all the Trader Claimants were qualified to purchase beer in duty suspension and could, therefore, seek to mitigate any adverse effect by purchasing such beer to meet demands from EU customers who might be reluctant to purchase duty paid beer at current prices. In paragraph 46 of his judgment the Judge noted that the IA specifically provided for a future review to establish the actual costs and benefits of the abolition of the WFE drawback arrangement and the achievement of the desired policy effect, so recognising an element of uncertainty in HMRC’s assessment of costs and allowing an opportunity of policy review. He said that appeared to be a pragmatic and rational approach.

The Claimants criticise the Judge’s analysis and approach for the following reasons. First, they say that the Judge seems to have been suggesting that the Commissioners and the Minister had consciously turned their minds to the evidence from the responses to the 2006 consultation on potential loss of business but then decided to give it no weight; whereas, in fact, they did not direct their minds to the point at all since no mention was made of it in the IA. Secondly, the Judge, in carrying out his analysis in paragraphs 39 to 46 of his judgment impermissibly stepped into the shoes of the decision-makers. They say that, if they are correct that the probable loss of business was a legally relevant consideration, but the Commissioners and the Minister failed to take it properly into account, then the decision to make the Regulations was unlawful and should be quashed. This is not one of those exceptional cases, the Claimants contend, where, despite such a failure, the court could refuse relief in the exercise of its discretion because it can with complete confidence say that, even if the matter had been taken into account, it would not have made any difference to the outcome. In this regard, the Claimants rely upon the following approach of Sedley LJ in Ali v Kirklees MBC [2001] EWCA Civ. 582 at [20]:

“If there is an answer to Mr Friel's complaint, it has to be (and Mr Lewis pitches his camp upon this terrain) that the evidence of the earlier accident could not have made a difference to the tribunal's decision. As I have said this is not a topic for ex post facto evidence. Nor, with respect, is to be tested, as Turner J appears to have tested it in refusing permission to appeal, by asking whether the decision was likely to have been influenced by the omitted information. The question is whether the information could have made any difference. The answer to it may turn on law – for example it may not have been legally relevant or admissible – or on fact – for example because it was on any view inconsequential or incapable of disturbing the weight of evidence going in the other direction. If it was relevant, or if ignorance of it was a source of unfairness, then it is only exceptionally that relief will be denied. The reasons for this are classically found in the remarks of Bingham LJ, as he then was, in R v Chief Constable of the Thames Valley Police ex parte Cotton [1990] IRLR 344 at 60. I will not recite them, but they are to be borne in mind in every case in which a breach of fair or proper procedure is established but it is asserted that the breach has made no difference.”

Thirdly, the Claimants say that the Judge’s analysis of why the business impact was speculative or incapable of reliable quantification was flawed. They rely upon the responses to the 2006 consultation, to which I have already referred; they dispute that there was any proper evidential basis for the Judge’s implication that there should be no real difficulties for the Trader Claimants to swap their WFE business with DE business; the answer to any lack of clarity of the kind mentioned by the Judge would have been for HMRC to seek further information from trade organisations such as the BBPA or individual traders, or at the very least to undertake an estimate of the relevant impact themselves, rather than ignore the evidence of impact altogether; although the Judge rejected the Claimants’ case that they were unable to purchase duty suspended beer from wholesalers, either at all or at the same price for which they could purchase duty paid beer, there was no evidence from HMRC to contradict that from the Claimants that discounts were only available on duty paid alcohol and not on duty suspended alcohol; nor did the Judge take into account the Claimants’ evidence that there would be fundamental logistical difficulties arising from the fact that the overseas customs authorities had not put in place systems to accommodate the large volumes of export that would be required under the DE arrangement, which would lead to significant delays in the provision by the overseas tax authorities of the documentation necessary to allow a claim to be made for repayment of United Kingdom duty; nor had useful guidance been provided by HMRC as to how United Kingdom exporters should interact with foreign tax authorities under the new scheme so as to ensure the appropriate documentation was in place to facilitate a speedy repayment of United Kingdom duty, but, on the contrary, HMRC had made the impracticable and legally dangerous recommendation that the destination country duty should be paid in cash.

Those points were made with force and considerable skill by Mr Sam Grodzinski, counsel for the Claimants. This first ground of appeal, nevertheless, clearly fails in my judgment. I have no difficulty in accepting that the impact of the withdrawal of the WFE drawback scheme on legitimate businesses was a material consideration in the decision making process. As the Claimants point out, that had been clearly highlighted in the 2006 consultation and the specific questions which consultees were asked to address. HMRC were aware of the concerns of some of the consultees, and those concerns were reflected in paragraphs 2.7 to 2.9 of the Responses Summary.

Mr Nicholas Sands, an employee of HMRC, whose responsibilities include contributing to departmental policy on drawback, has given evidence that he revisited the consultation responses before the Regulations were proposed, in order to make himself aware of their content. Mr Grodzinski submitted, and I accept, that the knowledge of Mr Sands of any significant matters not contained with the IA cannot be imputed to the Commissioners and the Minister who made the decision to lay the Regulations before Parliament. The position was explained by Sedley LJ and Keene LJ in R (National Association of Health Stores) v Department of Health [2005] EWCA Civ. 154. They both cited, with approval, the following statement of Gibbs CJ in the High Court of Australia in Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 30-31

"Of course the Minister cannot be expected to read for himself all the relevant papers that relate to the matter.  It would not be unreasonable for him to rely on a summary of the relevant facts furnished by the officers of his Department.  No complaint could be made if the departmental officers, in their summary, omitted to mention a fact which was insignificant or insubstantial.  But if the Minister relies entirely on a departmental summary which fails to bring to his attention a material fact which he is bound to consider, and which cannot be dismissed as insignificant or insubstantial, the consequence will be that he will have failed to take that material fact into account and will not have formed his satisfaction in accordance with law"

Sedley LJ and Keene LJ also approved the analysis of Brennan J in Peko-Wallsend as an accurate statement of the law. The relevant passages in Brennan J’s judgment were quoted in paragraph [61] of Sedley LJ’s judgment as follows:

“61.

I have found Brennan J’s judgment in Peko-Wallsend particularly helpful here. He said (at 61):

A decision-maker who is bound to have regard to a particular matter is not bound to bring to mind all the minutiae within his knowledge relating to the matter. The facts to be brought to mind are the salient facts which give shape and substance to the matter: the facts of such importance that, if they are not considered, it could not be said that the matter has been properly considered.

Then at 64:

[The] decision cannot be attacked on the ground that the minister has not given sufficient weight to detriment, but it can be attacked if the minister fails to have regard to detriment. The minister may deny any weight to detriment, but only if he has first had proper regard to that matter.

And at 65:

The department does not have to draw the minister’s attention to every communication it receives and to every fact its officers know. Part of a department’s function is to undertake an evaluation, analysis and précis of material which the minister is bound to have regard to or to which the ministers may wish to have regard in making decisions… The consequence… is, of course, that the minister’s appreciation of a case depends to a great extent upon the appreciation made by his department. Reliance on the departmental appreciation is not tantamount to an impermissible delegation of the ministerial function. A minister may retain his power to make a decision while relying on his department to draw his attention to the salient facts.”

Accordingly, the proper approach in the present case is that it was not necessary for every point of detail to be drawn to the attention of the Commissioners and of the Minister, and the IA will have been sufficient to sustain the validity of the decision to make the Regulations if the Departmental staff carried out an evaluation, analysis and précis of the available material and drew to the attention of the Minister and the Commissioners “the salient facts which [gave] shape and substance to the matter”.

It is clear, notwithstanding the Claimants’ submissions to the contrary, that the IA did recognise that the withdrawal of drawback under WFE would in some cases have a significant impact on businesses. That appears both from what was stated expressly and what was necessarily implicit in paragraph 23 of the IA. That paragraph stated expressly that “For legitimate businesses currently operating WFE there will be an impact”. The paragraph stated that the impact would be only marginal for most businesses for which WFE was not a core activity; but it was plainly implicit that, where WFE was a core activity, the impact would be significant. That interpretation of the IA is not undermined by the “assumption” in paragraph 10 of the IA that, if drawback under WFE was removed, businesses making legitimate WFE claims would continue to make the same average monthly number of claims using the DE arrangement. As is apparent from paragraph 11 of the IA, that was an assumption for the purpose of calculating the likely rise or fall in excise duty receipts, looking at the matter from the perspective of HMRC as a revenue collector.

That short point is sufficient to dispose of the first ground of appeal. For completeness, however, I do not accept that, before the Regulations were approved and laid before Parliament, there ought to have been further consultation to clarify the precise impact of the removal of drawback under WFE. The 2006 consultation had only recently been concluded, and the consultees were asked specifically about their commercial reasons for using the WFE option, the extent to which the removal of the WFE drawback arrangement would affect the consultees’ businesses, whether the removal of the arrangement would result in increased costs for their businesses (with a request for an estimate of that cost “per annum” and the basis of the estimate), why any consultees which were registered with HMRC as an owner of goods in a warehouse with a facility to purchase duty suspended goods dealt in duty paid goods, and whether they had any other comments on the removal of the WFE arrangement.

In those circumstances, HMRC and the Minister were entitled to rely upon the responses to the 2006 consultation, which were summarised in the Responses Summary. Further, as the Judge observed and Mr Philip Coppel QC, for HMRC, emphasised, other than a majority opposition in general to the withdrawal of the WFE drawback arrangement, the responses to the 2006 consultation did not demonstrate any consistency in the response to the specific questions asked. Very few of the respondents mentioned the potential loss of cross-border business, and, of those that did, no more than one or two laid particular emphasis on it. One consultee, for example, said that the removal would not have any effect on business, and would not increase costs, and that it would be simpler not have the WFE option. The Federation of Wholesale Distributors, representing the interests of United Kingdom wholesalers operating in the food, drink, tobacco, and related household non-food products market, said that the greatest losses to legitimate wholesale trade were due to duty fraud in the beer market; and it was their belief that it was the WFE drawback facility that was helping to fuel fraudulent sales. They said that the effect on their industry of duty fraud in beers, wines and spirits over recent years had been “nothing short of catastrophic”, and several of the members cited duty fraud as the greatest threat to their survival.

It was that diversity of view among the persons who responded to the 2006 consultation, combined with concern for the impact on legitimate businesses of the abolition of the WFE drawback arrangement, that led HMRC to take the course outlined in the Responses Summary, namely not to proceed with either of the options for changes outlined in the consultation document but to continue to monitor closely the level of excise duty drawback claims and to carry out detailed assurance work to ensure that drawback claims were valid in all respects.

Paragraph 3.5 of the Responses Summary made it clear, however, that there was a continuing process of review, and that removal of drawback under WFE was something which might be implemented if concerns over fraud were not dispelled by the proposed tightened procedures.

The Claimants maintain, and Mr Grodzinski forcefully submitted in his oral submissions, that HMRC wrongly assumed that the cause of the recent increase in WFE drawback claims prior to the IA was an increase in fraudulent rather than legitimate business activity, and so the decision to make the Regulations was also unlawful on that ground. It is perfectly clear, and Mr Grodzinski accepted, that the WFE drawback arrangement is inherently susceptible to fraud. HMRC had highlighted the risk of fraud, with its accompanying threat to the livelihood of compliant traders, as the reason for change. In his first witness statement Mr Sands identified the fraud risks inherent in excise duty drawback as being principally in relation to claims for drawback on goods that were never duty paid in the first place, and the re-entry (via WFE) of goods into the duty suspension system that are later diverted onto the United Kingdom market without payment of duty. Mr Sands explained that, following the issue of new guidance by HMRC in 2007 on the evidence required to satisfy HMRC that duty had been paid and there was an entitlement to drawback, the value of drawback claims between May 2007 and October 2007 dropped to £8 million from the figure of £18 million in respect of the same period in the previous year. There was then, however, a substantial increase in duty drawback claimed through WFE, particularly in relation to beer, which rose from £20.12 million in 2005/2006 to £48.14 million in 2008/2009. Mr Sands pointed out that, of the total of £70 million drawback claimed in 2008/2009 on alcohol intended for despatch or export from the United Kingdom, 90% was through WFE. He said that the majority of the claims had been for lagers that are popular in United Kingdom, whereas investigation had revealed that there had been a steady decline in the cross-border shopping market since 2003. The concerns of HMRC about fraud were highlighted in paragraph 1 of the IA, quoted above.

The IA gave the following further explanation as to why the course taken after the 2006 consultation, namely tightening evidential requirements, was no longer considered satisfactory:

“Option 3 – Tightening evidential requirements.

We tried this approach following consultation in 2006. Although initially successful, this measure proved to be ineffective as, we believe, fraudsters quickly found a way of circumventing our controls by providing manufactured evidence in support of non-eligible claims. Also, discrediting suspect claims involves complex and intensive supply chain audits and with claim numbers and values increasing it is becoming increasingly difficult to justify the disproportionate level of resources require to undertake this work.

•

Claim numbers have risen from 3874 in 2007/08 to over 5000 in 08/09.

•

There are 565 WFE claims currently on hand pending litigation/investigation with a combined value of £8.3 million.

•

At any given time, up to 20 staff can be tied up on this work (in policy, processing assurance, enforcement and legal services).”

In the first witness statement of Kevin White, the principal sales manager of the First Claimant, Seabrook Warehousing Limited, that analysis and the legitimacy of those concerns about fraud are disputed. He said the following in paragraphs 26 and 27 of his witness statement:

“26.

The only evidence that seems to be put forward by the Commissioners as being indicative of fraud is the fact that a number of drawback claims were made in respect of brands of alcohol that are popular in the UK. This is in no way indicative of fraud. A significant number of UK consumers travel to the continent to purchase alcohol (colloquially known as “booze cruises”). It is no wonder then that popular UK brands of alcohol are being exported to countries to which UK consumers may travel for the purposes of purchasing reduced price alcohol. In addition, there are numerous other markets, outside of the UK, where popular UK brands are in demand: specifically, the British ex-pat market is one such example.

27.

In addition, it is difficult to see how the Commissioners can maintain the assertion that the increase in WFE repayment claims is due to fraud when approximately 40% of the WFE claims documented in exhibit 14 to Mr Sands’s witness statement were made by 5 of the 6 export traders who are the Claimants in the present application. We have derived this having compared the total figures for WFE claims in Exhibit 14 (£35,763,483) to the figures supplied by the Claimants for the same period April 2007 to March 2008 (approximately £14,000,000). To the best of my knowledge, the Commissioners make no allegation of fraud against any of the present claimants. None of the Claimants have had any repayment claims refused on the basis of fraudulent activity.”

Mr White then sets out in paragraph 28 of his first witness statement several factors which were, he says, responsible for the increase in WFE claims but have nothing to do with fraud. They were: during 2006 brewers restricted the supply of duty suspended stock, and that gave rise to more export activity through the WFE system; an extended verification exercise was conducted by the Commissioners in 2006 leading to delayed payment of repayment claims, which in turn caused legitimate traders to question whether they could afford to trade in the industry given the uncertainty and damage to cash flow, but alternative evidence arrangements were then introduced by the Commissioners which gave certainty and promoted increased confidence about trading in the market; the WFE market had matured in the sense that more participants had entered the market increasing the overall level of claims; and individual companies, such as the Trader Claimants, had become more established, leading to the increase in the volume of trade, and reinvestment of profits back into businesses.

The Claimants point out that, of the £35.7 million of WFE drawback claims mentioned by Mr Sands for the period April 2007 to March 2008, approximately £14 million (that is to say 40%) is accounted for by 5 of the 6 Trader Claimants; and the Trader Claimants make up approximately 60% of all WFE claims for the period April 2008 to March 2009. There is no suggestion, however, that the Trader Appellants have fraudulently made claims, and none of them have had any of the claims refused on the basis of fraud. Mr Grodzinski elaborated on this point in his oral submissions. He said that HMRC assumed in the IA that annual drawback claims in excess of £16 million were fraudulent. He further observed, by reference to figures exhibited to Mr White’s first witness statement, that some £30 million had been paid out to the Trader Claimants and one other in 2008, of which only a small fraction had been disallowed, and without any allegation or fraud even in the case of that disallowance.

The Judge dealt with those points at paragraph [63] to [65] of his judgment as follows:

“63.

Finally, I should mention in this context a point made by Mr Grodzinski at the hearing. The calculations of HMRC assume that for the year 2008 only £16 million WFE drawback claims represented legitimate trade. For that year the Claimants made WFE drawback claims of £30 million, all of which were paid by HMRC. It was submitted that it was, therefore, irrational to treat at least £14 million of the Claimants’ drawback claims as fraudulent, when those claims had not been questioned.

64.

However, this submission confuses two different issues. The decision to abolish WFE was based upon an objective evaluation of the relevant market. There was no explanation of why WFE drawback claims had increased at the rapid rate disclosed by the data. In the absence of such an explanation, HMRC drew the conclusion that only about £16 million of the WFE claims could represent legitimate trade. In my view, that conclusion was rational and justifiable.

65.

On the other hand, it is notoriously difficult to prove fraud in any individual case. Indeed, if HMRC could readily ascertain which claims were fraudulent, and could show to the requisite level of proof that they were fraudulent, it is doubtful whether it would have been necessary to abolish WFE. It is precisely because HMRC cannot readily distinguish genuine from fraudulent transactions, and meet the requisite level of proof, that abolition of WFE, at least for the time being, was judged by HMRC to be necessary.”

Despite the criticisms of the Judge’s analysis, especially the criticism that he failed to take into account alternative explanations for the increase in the level of legitimate WFE claims addressed in the evidence of Mr White, I consider that the Judge’s approach was correct. As I have said, it is common ground between the parties, and was not seriously disputed in any of the responses to the 2006 consultation, that the WFE drawback arrangement is such as to facilitate fraud. As the Judge pointed out, and again the evidence indicates, it is notoriously difficult to prove fraud in any individual case. Paragraph 8 of the IA (quoted above) emphasised the complexity of investigating suspect claims, and the time and resources involved. As the Judge correctly observed:

“29…. The abolition of WFE was a measure of economic management. HMRC took the decision in order to combat what it perceived to be very substantial fraud in cross-border trade, leading to heavy loss of excise duty and distortion of competition in relevant markets, recognising explicitly that the decision could to a certain degree adversely affect legitimate trade. The decision required HMRC to assess complex economic and commercial factors, and to strike an informed and rational balance between competing interests. It is trite law that the Court will require clear and convincing grounds to justify interference with such a decision.”

HMRC and the Minster were entitled to conclude, in the light of the significant increase in drawback claims under WFE, particularly in relation to beer products, at the same time as there being no indication of any good reason for an increase in demand in member states, that a disproportionate level of resources was required to undertake work of inspecting and verifying suspect claims.

The Claimants also attack the decision to approve the Regulations and lay them before Parliament on the ground that the abolition of drawback under WFE would not reduce fraud, and would, if anything, reduce the control of HMRC over the movement of dutiable goods within the EU. An analysis in support of that argument is contained in the Claimants’ skeleton argument on the appeal and in the first witness statement of Mr White. Reliance is also placed on further evidence from Mr Sands and Mr White in their second witness statements made after the judgment below was given, showing that, notwithstanding the removal of the WFE drawback arrangement, levels of drawback are approaching their previous levels.

The Judge dealt in his judgment with this argument as follows:

“69.

It seems to me that on this issue I must proceed cautiously. HMRC has experience accumulated over many years of tackling fraud in this area, and has an operational understanding of the likely comparative efficacy of anti-fraud measures that the Court does not enjoy. I need, therefore, to accord appropriate weight to the considered judgment of HMRC that the direct export arrangements offer the authorities a better opportunity to combat fraud than is possible under WFE. I see force in the point made by Mr White in his evidence, but HMRC has itself identified the relevant risk and nonetheless concluded that direct export is a superior method of control.

70.

In these circumstances I am unable to find that HMRC’s assessment that the abolition of WFE is likely to reduce substantially the number of fraudulent drawback claims is one that no reasonable customs authority could have reached. However, I do again note that the policy is to be kept under review, and HMRC will no doubt in the period ahead monitor whether the policy has achieved its objective as an anti-fraud measure.”

The Judge’s approach was correct. As I have said, HMRC had legitimate grounds for believing, for the reasons set out in the 2006 consultation document, the IA and Mr Sand’s first witness statement, that drawback under WFE was such as to facilitate fraud, and that its abolition was likely to reduce fraud. The fact that fraud might also be involved under the DE drawback arrangement is no ground in the circumstances for impugning the decision to make the Regulations. Furthermore, as the Judge observed, the IA did acknowledge and took account of the risk that, following abolition of the WFE drawback arrangement, fraud could increase in DE drawback. The IA said:

“21.

There remains a risk (over time) that criminal gangs could adapt and establish new networks / warehouses in other Member States to legitimise movements through the alternative ‘direct export’ drawback scheme, where UK duty is repaid only after evidence of duty payment in another member state is provided, and that fraudulent repayment levels may rise. But the ‘direct export’ system is inherently more secure and it will be more difficult for the would-be fraudster to abuse that system. But we shall be monitoring the position very closely and keeping it under review.”

I find that, in all those circumstances, the IA was a fair summary of all the major issues relevant to the decision making process. It is sufficient that more detailed considerations were known to Mr Sands, and that he carried out a fair process of distillation so as to reduce the main considerations to those which featured in the IA.

The Claimants submit that procedural fairness required that a further consultation be carried out before the decision to abolish drawback under WFE was taken, in the light of the significance of that withdrawal to persons in the position of the Claimants. As I have said, when touching on this point earlier in this judgment, the Claimants emphasise that interested parties, such as the Claimants, were given no opportunity to present their case as to what had in fact led to the increase in drawback claims since the conclusion of the 2006 consultation. The Judge dismissed that argument in paragraphs 78 and 79 of his Judgment as follows:

“78.

All that happened after the 2006 consultation was that, after a relatively short period, WFE drawback claims continued to increase rapidly, just as they had increased in the period leading to the 2006 consultation. Furthermore, just as in respect of that previous period, there was no obvious objective economic reason for the increase. The phenomenon – the unexplained increase in WFE drawback claims – was precisely the same; only the period was different. There was no material change in the basic circumstances that could begin to support a case for re-consultation.

79.

In my judgment, fairness did not require that HMRC should allow interested parties another opportunity in 2009 to comment upon a matter – the increase in WFE drawback claims – that they had been able to comment upon in the 2006 consultation. Indeed, putting aside the plainly unconvincing point about the depreciation of sterling (see paragraph 58 above), the Claimants are not able to show what new and relevant arguments they would have advanced in a putative 2009 re-consultation that they had not been able to advance in the actual 2006 consultation.”

The Claimants submit that there must have been a sufficient material change of circumstances between the consultation in 2006 and the decision to make the Regulations in 2009 to lead HMRC to change its mind as to whether abolition was justified. The Claimants further say that, in so far as the Judge regarded the evidence on the impact of abolition on legitimate businesses, such as those of the Claimants, as “speculative” and “not capable of reliable quantification”, that also re-enforces the need for there to have been further consultation in order to seek information from interested parties prior to the decision in 2009 to make the Regulations.

The Judge’s approach to this issue was correct. For the reasons I have already given, all the principal issues were properly contained in the IA. There was no need for further consultation, bearing in mind that the 2006 consultation had been completed relatively shortly before the decision was taken in 2009 to remove the WFE drawback arrangement, and having regard to the specific questions, and the responses to them, in the 2006 consultation exercise.

The Claimants contend that the decision to make the Regulations was unlawful because their effect would be significantly to interfere with the free movement of goods between United Kingdom and other member states, and also significantly to impair the Claimants’ ability to trade altogether, contrary to the fundamental right under Community law of freedom to trade. The Claimants do not dispute that this freedom may be restricted so as to combat fraud, but they submit that any such restriction must correspond to that aim and be proportionate, which the Regulations were not.

The Judge’s short answer to the Claimants’ case under this ground of challenge was that Article 22 of the Directive specifically regulates reimbursement of excise duty in respect of goods on which duty has been paid and which are exported to another member state; but it does not require in such circumstances that the member state of despatch should reimburse excise duty before the goods have been exported and before the excise duty due in the member state of destination has been paid or secured.

The Claimants state that the Judge’s reference to the requirements of Article 22 of the Directive was inapposite since it was no part of their case that Article 22 positively demanded that member states implement the WFE drawback arrangement. Their point is that, having implemented such a system of drawback for many years, allowing a particular kind of legitimate trade to develop, in which the Claimants have legitimately participated, the United Kingdom cannot lawfully abolish WFE drawback in a way that will detrimentally effect that trade, unless such an abolition is a proportionate response to the problem of fraud. The Claimants contend that the Regulations were not a proportionate measure since their effect was to abolish the WFE drawback arrangement regardless of whether or not legitimate traders could prove to HMRC’s satisfaction that their claims to WFE drawback were genuine and there was no fraud involved, whereas alternatives would have included the further tightening of evidential requirements and the devotion of more time and resources to investigating suspected cases of fraud on a case by case basis. The Claimants contend that such an alternative approach would properly balance the fundamental business interest of legitimate traders, whose burdens HMRC had stated in paragraph 1.1 of the 2006 consultation document they did not wish to increase, and the general need to combat any fraud in the WFE trade.

Having rejected the Claimants’ other grounds for attacking the decision-making process leading to the making of the Regulations, this ground of appeal must also fail. For the reasons I have given, the decision of HMRC and the Minister to abolish the WFE drawback arrangement was a rational and proportionate response, bearing in mind the apparent failure of the course decided upon by HMRC as a result of the 2006 consultation, the level of resources required to undertake the effective investigation of suspect claims, and the difficulties associated with the uncovering of fraud.

As I have said, following the judgment below, Mr Sands and Mr White each made a further witness statement. These dealt principally with the impact of the abolition of WFE drawback and related matters. Both counsel agreed that the new material could not be relied upon directly in supporting or meeting the Claimants’ criticism of the decision-making process leading to the Regulations, but they would be of relevance in determining what relief should be granted if that decision-making process was legally flawed. In particular, they would be relevant as to whether a declaration should be made rather than a quashing order. It is not necessary to say anything further about that new evidence since, for the reasons I have given, I would dismiss the appeal.

For the reasons I have given, I would refuse permission to apply for judicial review on the first, third and fourth grounds advanced before the Judge, corresponding to the second and third grounds of appeal, and would dismiss the appeal on the second ground advanced before the Judge, corresponding to the first ground of appeal.

I agree.

I also agree.