Euro Wines (C&C) Ltd v HM Revenue and Customs

This appeal raises one issue. Where a penalty is imposed on a person in possession of goods on which it is alleged that excise duty has not been paid, is the reverse burden of proof on whether duty has been paid incompatible with article 6(2) of the European Convention on Human Rights and Fundamental Freedoms (the Convention)? The Upper Tribunal held that it was compatible and Euro Wines (C&C) Limited (the appellant) appeals with leave granted by this court.

The penalty in this case was imposed under paragraph 4(1) of schedule 41 to the Finance Act 2008 which provides:

As is apparent from the terms of paragraph 4(1), a penalty may be imposed on any person irrespective of their own liability to pay the excise duty on the goods. It is enough that they have come into possession of the goods or been concerned in their carriage etc at a time when duty should have been, but has not been, paid. By virtue of paragraph 6, the amount of the penalty will be determined according to whether there has been a deliberate and concealed act or failure (100% of the potential lost revenue), a deliberate but not concealed act or failure (70%) or an act or failure that was neither deliberate nor concealed (30%), with power for HMRC to reduce the penalty. The penalty in the present case (£31,864.40), as reduced by HMRC, fell into the last of these categories.

On an appeal to the First-tier Tribunal against the imposition of a penalty under paragraph 4(1), the burden of proving that duty has been paid on the goods lies on the appellant. This arises under section 154(2) of the Customs and Excise Management Act 1979 which provides:

Section 154(2) applies to all types of proceedings: civil proceedings, proceedings that are criminal under domestic law and proceedings that would otherwise be civil under domestic law but are criminal proceedings for the purposes of article 6 of the Convention.

The provisions of section 154(2) have for many years formed part of the legislation governing proceedings relating to customs or excise. Its immediate predecessor, section 290 of the Customs and Excise Act 1952, itself consolidated earlier provisions. They reflect the particular difficulties in collecting duty on moveable goods, as well as the importance of the collection of duty to the public finances.

The effect of section 154(2) on proceedings concerning a penalty under paragraph 4(1) is that burden of proof is in part reversed. The burden is on the Commissioners (HMRC) to establish that the person in question has acquired possession of goods or been concerned in their carriage etc, that the goods are chargeable with duty and that the excise duty point for the goods has passed. The burden is on the appellant to establish that the duty has in fact been paid.

The rigours of this regime are mitigated not only by the opportunity provided to the person concerned to establish that duty was paid on the goods but also by other provisions.

First, paragraph 14 of schedule 41 which provides for a reduction if there are special circumstances (which HMRC’s Compliance Handbook defines as “uncommon or exceptional” and “where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law”).

Second, paragraph 20 provides a defence of reasonable excuse:

For the purposes of sub-paragraph (1) –

The underlying facts of the present case may be summarised as follows. The appellant is a wholesale dealer in alcoholicdrinks. Between March 2012 and January 2013, it purchased excise goods from Galaxy Cash & Carry Limited (Galaxy). HMRC discovered that the goods had been apparently supplied to Galaxy by Vanguard Breweries. HMRC were aware that Galaxy had been dealing with “missing traders” and when officers visited the address of Vanguard Breweries, they found that it was wasteland on which there had once stood a pub which had burnt down. Galaxy had been unable to produce evidence of duty paid. HMRC concluded that excise duty had not been paid. They accepted that the goods had been delivered to the appellant by Galaxy, so that it was not the first person to have held and controlled the goods and accordingly was not liable for the excise duty on them. HMRC issued the penalty of £31,864.40 under paragraph 4(1) of schedule 41.

The appellant appealed against the penalty to the First-tier Tribunal (FtT) which dismissed the appeal. It rejected the submissions based on incompatibility with article 6 principally on the ground that appeals against penalties under paragraph 4(1) were not criminal proceedings for the purposes of article 6. On appeal, the Upper Tribunal held that that they were criminal proceedings for these purposes and HMRC have not challenged that decision.

The Upper Tribunal dismissed the appeal on the grounds that the reverse burden of proof on whether duty had been paid on the goods was compatible with article 6.

Article 6(2) provides that “Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law”. The presumption of innocence is one of the elements of a fair criminal trial required by article 6(1).

It is common ground that, notwithstanding the bald terms in which article 6(2) is expressed, this right is not unqualified. In Salabiaku v France (1988) 13 EHRR 379, which concerned a provision of the French Customs code whereby any person in possession of smuggled goods was deemed responsible for customs evasion, the European Court of Human Rights (the Court) stated:

In Janosevic v Sweden (2002) 38 EHRR 473, the Court rejected a complaint that the imposition of tax surcharges was incompatible with article 6(2). Under Swedish tax law, a penalty could be imposed on a taxpayer who submitted incorrect information to the tax authority. The penalty in the case of income tax was 40% of the tax that would not have been collected if the tax authority had accepted the incorrect information. The imposition of a penalty did not depend on any intent or negligence on the part of the taxpayer. The burden of establishing that the taxpayer had supplied incorrect information lay on the tax authority.

There were provisions under which the penalty would not be imposed or would be remitted, for example, if the provision of incorrect information was excusable due to the nature of the information or other special circumstances or if the imposition would be manifestly unreasonable. The burden of proving that there was reason to cancel or remit a penalty lay on the taxpayer. As the Court remarked in its judgment at [100]:

Applying its judgment in Salabiaku, the Court said at [101]:

A principal ground of challenge by the applicant was that it was in practice very difficult for the taxpayer to rebut the presumption. While accepting that this was the case, the Court stated that it was nonetheless open to the trader to adduce evidence in support of a reduction or remission of the penalty, and observed that in the case before it the taxpayer had not in fact done so. The Court continued at [103]:

The Court stated its conclusion at [104]:

Janosevic was one of the cases considered by the House of Lords in Sheldrake v DPP [2004] UKHL 43; [2005] 1 AC 264, in a combined appeal which considered presumptions against a defendant in two very different contexts, control of a motor vehicle having consumed more than the prescribed limit of alcohol and membership of a prescribed organisation contrary to the Terrorism Act 2000. Having reviewed the cases, Lord Bingham said at [21]:

At [31], Lord Bingham said: “The task of the court is never to decide whether a reverse burden should be imposed on a defendant but always to assess whether a burden enacted by Parliament unjustifiably infringes the presumption of innocence”.

In the present case, the appellant emphasised in its evidence the difficulty of rebutting the presumption that duty had not been paid on the goods in question. In a witness statement made by Mr Balbir Singh Ghuman, a director of the appellant, he said:

Mr Ghuman said that the appellant had relied on the facts that the goods in question were not unduly cheap and that VAT had been charged on them. This latter point supported the impression that the appellant was buying duty paid stock because “[d]uty suspended stock does not incur VAT and I would have thought anyone selling illicit alcohol would either not invoice at all or at least not produce a proper VAT invoice”. In his oral evidence to the FtT, Mr Ghuman said that he held a due diligence file relating to Galaxy, containing a copy of its certificate of incorporation and a copy of its director’s driving licence. After HMRC’s initial enquiries he made further checks and obtained various documents. He said in evidence that, because Galaxy’s invoices to the appellant showed VAT to have been paid, he had assumed that duty had also been paid.

The FtT found, on the basis of Mr Ghuman’s evidence, that the appellant did not make any specific enquiry of Galaxy whether duty had been paid but assumed that, because VAT was shown as paid, duty had also been paid. This was a fundamental failure and it found that there was no reasonable excuse for the failure to ask whether the duty had been paid. The appellant was not therefore entitled to rely on the defence under paragraph 20 of schedule 41. HMRC accepted that if proper due diligence had been carried out, it would have amounted to a reasonable excuse. The Upper Tribunal refused the appellant permission to appeal against these findings and conclusions. The FtT also found that there were no exceptional circumstances justifying a reduction or cancellation of the penalty, against which no permission to appeal was sought.

The Upper Tribunal accepted that there could be practical difficulties for a trader to prove that duty had been paid. It also accepted that, unlike the position in Janosevic, there was no requirement on the part of the trader to provide information and that, unlike the position of being in charge of a motor vehicle while in excess of the alcohol limit (where the burden of proving that there was no likelihood of the defendant driving the vehicle is on the defendant), it was not always obvious that the trader was better placed than HMRC to prove that duty had been paid.

The Upper Tribunal set out its analysis and conclusions as follows:

In challenging this decision, Mr Bedenham on behalf of the appellant advanced three principal submissions.

First, it was submitted that the Upper Tribunal failed to recognise or to attach appropriate weight to the fact that HMRC had to conduct an investigation and confirm that duty was outstanding on the goods. Mr Bedenham drew attention to the terms of paragraph 4(1) of schedule 41 to the Finance Act 2008 which provides that a penalty is payable if “a payment of duty is outstanding and has not been deferred” at the time that the trader acquires possession of the goods or is concerned in their carriage etc. This requires HMRC to be satisfied that this is the case, which normally they do by tracking ownership back through the supply chain, using sale and purchase documentation. In these circumstances, HMRC is the appropriate party to prove that duty has not been paid.

Second, the Upper Tribunal did not have proper regard to the insurmountable difficulty for the trader in proving that duty had been paid. While HMRC has statutory powers to compel traders to disclose their supplier, enabling them to track back through the supply chain, a trader has no such power and is likely to face great resistance from suppliers to providing this commercially sensitive information. The longer the supply chain, the greater the difficulties facing traders. Even if a trader could obtain this information, it is only HMRC who can say for certain that duty was paid.

Third, having regard to those difficulties, the Upper Tribunal attached disproportionate weight to the defence of reasonable excuse and to the effective requirement that the trader take reasonable steps to check that duty has been paid.

The compatibility with article 6(2) of the reverse burden of proof on the payment of duty depends, as Lord Bingham said in Sheldrake at [21]: “on examination of all the facts and circumstances of the particular provision in the particular case”.

In my judgment, a consideration of the factors relevant to this particular reverse burden lead to a clear conclusion that it is compatible with article 6(2).

First, the context is important. Although the penalty is treated as criminal for the purposes of article 6(2), it is essentially a regulatory penalty which is not dependant on proof of any fault on the part of the trader. It does not involve any moral or social stigma. This was considered relevant by Lord Bingham in Sheldrake where at [21] he referred to “the importance of what is at stake”. This refers back to what he said about absolute offences at [6]. Referring to offences found in legislation regulating the conduct of economic and social life, Lord Bingham said: “Offences against such regulations are often regarded as not truly criminal, since the penalty inflicted is not dire and little or no stigma attaches to conviction.” This may be said to apply with greater force in a case such as the present where the penalty is not, as a matter of domestic law, criminal at all.

A further feature of the context is that the class of persons on whom a penalty may be imposed are traders in duty goods. They have chosen to carry on business in a sector where the payment of duty is a factor of the highest importance and where, as they know, they are exposed to the risk of penalties in certain circumstances. Their position is rather different from the ordinary taxpayer who may nonetheless be exposed to penalties to which a reverse burden applies under the Swedish tax system.

This point too was discussed in Sheldrake. Lord Bingham referred at [27] to the decision of the House of Lords in R v Johnstone [2003] UKHL 28; [2003] 1 WLR 1736 concerning a conviction for the possession of a large quantity of bootleg recordings contrary to section 92 of the Trade Marks Act 1994. The Act provided that it was a defence to show that the defendant believed on reasonable grounds that the offending use of a trade mark was not an infringement of the trade mark. Giving the lead judgment in that case, Lord Nicholls of Birkenhead said at [52] that

Commenting on R v Johnstone, Lord Bingham said in Sheldrake that offences under section 92 are committed by “dealers, traders, market operators, who could reasonably be expected (as Lord Nicholls pointed out) to exercise some care about the provenance of goods in which they deal”. The parallel with the present case is obvious.

Against this context, it is highly significant that the trader can, first, seek to rebut the presumption that duty was not paid and, secondly, show that he undertook due diligence as regards the supply of the goods and thereby show that he has a reasonable excuse.

Mr Bedenham submitted that a trader faces great difficulties in rebutting the presumption and that HMRC is in a better position to demonstrate that duty has not been paid. The difficulty in rebutting a presumption was held to be insufficient in Janosevic to render the reverse burden in that case incompatible with article 6(2). In any event, the Upper Tribunal in this case concluded that it was not possible to conclude with clarity which out of the trader or HMRC would be the appropriate person to prove the question of duty payment; it all depends on the circumstances of individual cases. I see no reason to disagree with this assessment.

What is undeniable is that traders are in a good position, and it should be part of the routine conduct of their business, to undertake due diligence as regards the provenance of goods purchased by them. As the Upper Tribunal said at [42]:

Due diligence is not foolproof. There will be occasions when, notwithstanding the reasonable steps taken by a trader, it transpires that duty has not been paid on goods purchased by him. In such a case, the trader will establish the defence of reasonable excuse.

In circumstances where the evasion of duty is a longstanding problem, with serious consequences for the public finances, it is, in my view, reasonable and proportionate that some burden is cast on traders to take reasonable steps to satisfy themselves that duty has been paid on stock purchased by them.

I should note a further submission made by Mr Bedenham, that while it may in some circumstances be right to reverse the burden of proof in relation to a defence, it cannot be right to do so as regards an essential element of the offence and in none of the cases has such a reverse burden been held to be compatible with article 6(2). Mr Bedenham modified this submission by accepting that a reverse burden might be compatible where the relevant element of the offence was within the sole knowledge of the defendant. There is nothing in the decisions of the Court or in the judgments in Sheldrake to justify this distinction. It would be formalistic to say that, while a reverse burden in relation to a defence may be compatible, it can either never be compatible as regards an element of the offence or can be compatible only when the relevant facts are within the sole knowledge of the defendant. It is always a question of examining the reverse burden in its particular context and determining whether it is reasonable and proportionate.

For these reasons, which in large part reflect those of the Upper Tribunal, I would dismiss this appeal.

I agree.

I also agree.