Kilo Ltd v The Commissioners for HMRC

These appeals relate to a C18 Post Clearance Demand Notice issued by HMRC to Kilo Ltd (“Kilo”) for the payment of Anti-Dumping Duty (“ADD”) in the sum of £249,720.59 plus VAT in the sum of £49,944.12 (“the Demand”). The Demand was made on 26 June 2017 and varied on review on 10 November 2017. It was in respect of imports of citric acid by Kilo during the period from 8 July 2014 to 16 March 2015, which were declared to have originated and been dispatched from Malaysia. HMRC’s case is that the citric acid had in fact originated from China but had been shipped from China to Malaysia before importation to the United Kingdom. Kilo subsequently applied for remission or repayment of the Demand, which HMRC refused on 9 April 2019.

The appeal with the reference TC/2017/08856 is against the imposition of the ADD (“the ADD Appeal”). The appeal with the reference TC/2019/02354 is against the refusal to remit or repay the Demand (“the Repayment Appeal”).

The following background was not in dispute.

Kilo carries on business in the handling and distribution of (amongst other things) chemicals for use as ingredients in food. These are imported to the United Kingdom from all over the world. Kilo, as with other companies in the same industry, must meet stringent demands of product traceability and identification for the purposes of obtaining British Retail Consortium approval. This then enables Kilo to supply large food manufacturers.

Mr Mark Taylor is a director of Kilo and has over 35 years’ experience in the industry. Mr Rock was a senior manager of Kilo at the time of the relevant consignments. He is still employed by Kilo.

Prior to 2013, Kilo had imported citric acid from China. However, in 2013, Kilo was approached by various suppliers apparently offering citric acid from Malaysia. This was appealing to Kilo as having alternative suppliers outside China could help insulate against fluctuations in availability and price.

Kilo duly purchased and imported the citric acid between July 2014 and March 2015. These were all purchased through Globalchem Group Co Ltd trading as GLC Nutrition (“Globalchem”) which was based in China. However, the consignors were companies named Extern Enterprise, Sunpower Manufacture, Rinting Harmoni Resources, and Superior Worldwide Industrial. These went through Port Klang in Malaysia. Mr Darren Rock dealt with all matters relating to the suppliers and these consignments. Mr Taylor had no involvement.

It was Kilo’s understanding that the citric acid originated in Malaysia. Kilo relies in particular on the fact that each of the consignments relied upon documents entitled “Certificate of Origin” issued by the Malay Chamber of Commerce, Malaysia (“the Chamber of Commerce”).

The European Anti-Fraud Office (“OLAF”) subsequently investigated the origin of citric acid which purported to originate from Malaysia but which OLAF suspected in fact originated from China. An OLAF mission to Malaysia took place from 5 to 11 November 2015 in order to investigate the origin of citric acid imported from Malaysia to the European Union and in order to discuss the matter with the Malaysian authorities including the Ministry of International Trade and Industry (“MITI”).

OLAF’s mission report was issued on 18 January 2016. This included the following in the body of the report or in an explanatory note (which we include in the agreed background upon the basis that it is not in dispute that this was what OLAF said, albeit that we note that Kilo makes it clear that it does not have any knowledge about whether or not OLAF’s findings were accurate).

“[Explanatory Note]

…

In the FCZ [Free Commercial Zone] any form of manufacturing activity is strictly forbidden. In the FCZ, there are allowed only simple commercial activities such as trading, breaking, packing, repacking, sorting, grading, labelling, relabelling, or repair of goods in storage or transit. However, in order to conduct such commercial activities, the operators in the FCZ have to obtain a written permission from the Port Klang Authority.

For goods coming or going out through the seaport in Port Klang, there is no other alternative way than passing through the FCZ. The following procedures are applicable in the FCZ, which are managed and supervised solely by the Port Klang Authority:

ZB1 Import (ZB1) – entering of goods into FCZ from overseas.

ZB1 Export (the former ZB2 and hereafter and in the mission report referred to as ZB2) leaving of goods from FCZ to overseas.

…

ZB1 and ZB2 declarations consist of range of data such as country of origin/destination, consignor, consignees, number of container, vessel, bill of lading, etc.

…

In general, all goods entering the FCZ have to be covered by ZB1 declarations. The relevant declaration ZB1 has to be lodged to the Port Klang Authority within 30 days from the date of arrival of goods into the FCZ. However, if goods are declared immediately or within 30 days from their arrival for importation into Principal Customs Area (K1 declaration), the operator is released from his/her obligation of lodging a ZB1 declaration to the Port Klang Authority.

If goods are re-exported from the FCZ, an operator is obliged to lodge to the Port Klang Authority, a ZB2 declaration. In the ZB2 declaration, an operator is obliged to insert register number of the corresponding ZB1 entry. This is an additional tool for the Port Klang Authority to supervise the movement of goods through the FCZ. It should be underlined that a ZB2 declaration can be lodged to the Port Klang Authority only when the corresponding ZB1 entry has been accepted and duly registered by them.

…

The Port Klang Authority confirmed that when a consignment is registered in the ZB1 registry and subsequently in the corresponding ZB2 registry, it is clear that such consignment has never been moved from FCZ to the Principal Customs Area of Malysia.

However, the mission team identified several consignments which were registered in ZB1 (entering of Free Commercial Zone from China), ZB2 (leaving Free Commercial Zone to the European Union) and K2 (export from Principal Customs Area of Malaysia to the European Union). Such composition is itself contradictory as goods in question has never been in the Principal Customs Area of Malaysia (registration in ZB1, and in ZB2) and therefore could not be subject to exportation procedure.

Based on these findings, and the whole context of procedures applied in the FCZ, it is concluded that the K2 declarations in question did not reflect the real movement of goods and were produced only to falsely lend credibility that the goods originated in Malaysia.”

[Mission Report]

“Malaysia does not produce citric acid and all of the citric acid exported by Malaysia therefore constitutes a re-export of citric acid originating in other countries.

…

MITI provided OLAF with a list of exports of citric acid data (K2 data) extracted from the export declarations submitted to the Malaysian Customs. The list of all exports of citric acid to the EU contains 100 records. The containers listed in these 100 records were matched with the ZB2 data provided by MITI. The result of this matching exercise was that, out of 100 records, 26 containers with citric acid were also found in the ZB2 data which subsequently matched with the ZB1 data which indicates that these citric acid consignments had been transhipped and thus have Chinese origin …

…

Based on the information and documents provided by the Malaysian authorities, it was established that 635 shipments loaded with citric acid as listed in annex 3 originate in or were consigned from China. This list contains the ZB1 and ZB2 data in relation to products under tariff heading 2918 exported to the EY for the period 1.2.2012 to 23.9.2015. The citric acid was shipped from China to the FCZ in Port Klang and, after reloading, was consigned to the EU. It was not subject to any processing or manufacturing activity in the FCZ in Port Klang.

It was also established that 318 unique containers imported into the EU loaded with citric acid matched with the ZB1 and ZB2 data for consignments of citric acid (see under point 3.2.2).

…

In total, out of the 318 containers declared to the EU, 26 containers loaded with citric acid declared to the Malaysian Customs for exportation and consequently recorded as exports from the Principal Customs Area, were also matched with the ZB1 and ZB2 data. It appears that the sole purpose of these declarations was to mislead the authorities and to claim Malaysian origin for the goods concerned. This was reported by the mission team to MITI.

…

OLAF matched the consignments of imported citric acid already communicated by Member States with the relevant ZB1 and ZB2 data. This concerns data on consignments for which it had been established that the citric acid is originating in China (ZB1 data) and had been declared for export to the EU (ZB2 data). The consignments communicated by the EU Member States were compiled in one master list containing a total of 627 containers. The matching was carried out based on the container numbers. As a result, OLAF could so far match in total 318 containers for the following EU Member States: … UK 51.

…”

On 15 December 2016, HMRC wrote to Kilo setting out their intention to raise a post-clearance demand. Following correspondence between HMRC and Kilo’s representative, the Demand was issued on 26 June 2017 in the sum of £255,476.85 plus VAT of £51,095.37. Following further correspondence between the parties, this was varied by a review letter dated 10 November 2017 to £249,720.59 plus VAT in the sum of £49,944.12. The variation was because one import entry was not in fact subject to ADD.

On 9 March 2018, Kilo applied for repayment of the sums paid under the Demand pursuant to Articles 119 and 120 of the Union Customs Code (EU Regulation 953/2013) (“Article 119” and “Article 120” respectively). Following correspondence between the parties, HMRC refused this application by a letter dated 9 April 2019.

In the course of opening, Miss Kisiel helpfully clarified that Kilo was not pursuing any argument for repayment upon the basis of Article 120, as she accepted that there were no special circumstances which could be relied upon to do so.

There is no dispute as to the quantum of the duties if they were correctly imposed, subject of course to the application for repayment in full.

The parties helpfully agreed that the remaining issues in dispute are as follows:

Save for as set out in paragraphs 18 to 20 below, the legal framework was not in dispute.

The relevant anti-dumping provisions are as follows:

There is a dispute between the parties as to whether or not HMRC are seeking to treat the Extensions Regulations as having retrospective effect. Miss Kisiel notes that Kilo’s imports of citric acid were from 8 July 2014 to 16 March 2015 and so before the Extension Regulations came into force on 15 January 2016. Miss Kisiel also notes that the Extension Regulations do not say that they are retrospective and Article 4 states that, “This Regulation shall enter force on the day following its publication in the Official Journal of the European Union.”

Mr Carey submits that HMRC is not relying upon the Extension Regulations but instead relies upon the pre-existing measures. He sets out the chronology as follows:

We accept Mr Carey’s submissions. Whilst Miss Kisiel is correct to say that the Extension Regulations do not have retrospective effect, HMRC does not need to rely on those regulations and does not seek to do so. Instead, HMRC is relying upon the combination of the Basic Regulation, the Definitive Regulation, and the extension of the Definitive Regulation by virtue of the Continuation Regulation. We are reinforced in our view by the following explanation within the preamble to the Extension Regulations which sets out what the existing measures were prior to the Extension Regulations coming into force:

“1.1.

Existing measures

(1)

The Council, following an anti-dumping investigation (‘the original investigation’), imposed a definitive anti-dumping duty on imports of citric acid originating in the People’s Republic of China (‘PRC’) by Regulation (EC) No 1193/2008. The measures took the form of an ad valorem duty ranging between 6,6% and 42,7% (‘the original measures’).

(2)

The European Commission (‘the Commission’), by Decision 2008/899/EC accepted the price undertakings offered by seven Chinese exporting producers or group of exporting producers together with the China Chamber of Commerce of Metals, Minerals & Chemicals Importers and Exporters.

(3)

The Commission, by Decision 2012/501/EU, subsequently withdrew the undertaking offered by one exporting producer, i.e. Laiwu Taihe Biochemistry Co. Ltd (‘Laiwu’).

(4)

By Implementing Regulation (EU) 2015/82 the Commission following an expiry review and a partial interim review (‘previous investigations’) pursuant to Article 11(2) and (3) of the basic Regulation respectively, maintained the definitive measures and amended their level. The definitive anti-dumping duties in force on imports of citric acid originating in the PRC range between 15,3% and 42,7%.”

The Combined Nomenclature Regulation (Reg EEC) No 2658/87 provides for the imposition of tariffs.

Article 201 of the Community Customs Code, Council Regulation (EEC) 2913/92 provides for a debt to be incurred where imported goods are misclassified:

“Article 201

1.

A customs debt on importation shall be incurred through:

(a)

the release for free circulation of goods liable to import duties, or

(b)

the placing of such goods under the temporary importation procedure with partial relief from import duties.

2.

A customs debt shall be incurred at the time of acceptance of the customs declaration in question.

3.

The debtor shall be the declarant. In the event of indirect representation, the person on whose behalf the customs declaration is made shall also be a debtor.

Where a customs declaration in respect of one of the procedures referred to in paragraph 1 is drawn up on the basis of information which leads to all or part of the duties legally owed not being collected, the persons who provided the information required to draw up the declaration and who knew, or who ought reasonably to have known that the such information was false, may also be considered debtors in accordance with the national provision in force.”

Regulation (EU) No 952/2013 (the Union Customs Code”) deals with repayment and remission. The relevant articles of the Union Customs Code are as follows:

“Article 116 – General provisions

1.

Subject to the conditions laid down in this Section, amounts of import or export duty shall be repaid or remitted on any of the following grounds:

(a)

…;

(b)

…

(c)

error by the competent authorities;

(d)

....

Where an amount of export duty has been paid and the corresponding customs declaration is invalidated in accordance with Article 174, that amount shall be repaid.

…

Article 119 – Error by the competent authorities:

1.

In cases other than those referred to in the second subparagraph of Article 116(1) and in Articles 117, 118 and 120, an amount of import and export duty shall be repaid or remitted where, as a result of an error on the part of the competent authorities, the amount corresponding to the customs debt initially notified was lower than the amount payable, provided the following conditions are met:

(a)

the debtor could not reasonably have detected that error; and

(b)

the debtor was acting in good faith.

2.

Where the conditions laid down in Article 117(2) are not fulfilled, repayment or remission shall be granted where failure to apply the reduced or zero rate of duty was as a result of an error on the part of the customs authorities and the customs declaration for release for free circulation contained all the particulars and was accompanied by all the documents necessary for application of the reduced or zero rate.

3.

Where the preferential treatment of the goods is granted on the basis of a system of administrative cooperation involving the authorities of a country or territory outside the customs territory of the Union, the issue of a certificate by those authorities, should it prove to be incorrect, shall constitute an error which could not reasonably have been detected within the meaning of point (a) of paragraph 1.

The issue of an incorrect certificate shall not, however, constitute an error where the certificate is based on an incorrect account of the facts provided by the exporter, except where it is evident that the issuing authorities were aware or should have been aware that the goods did not satisfy the conditions laid down for entitlement to the preferential treatment.

The debtor shall be considered to be in good faith if he or she can demonstrate that, during the period of the trading operations concerned, he or she has taken due care to ensure that all the conditions for the preferential treatment have been fulfilled.

The debtor may not rely on a plea of good faith if the Commission has published a notice in the Official Journal of the European Union stating that there are grounds for doubt concerning the proper application of the preferential arrangements by the beneficiary country or territory.”

The term “competent authorities” is not defined in Article 119. It was held in Illumitrónica – Illuminação e Electrónica Ld v Chefe Da Divisão de Procedimentos Aduaneiros e Fiscais/Direcção das Alfândegas de Lisboa (Case C-251/00)[2002] ECR I-40433 at [40] that this includes:

“…any authority which, acting within the scope of its powers, furnishes information relevant to the recovery of customs duties and which may thus cause the person liable to entertain legitimate expectations. … The Court has made it clear that this applies in particular to the customs authorities of the exporting Member State which deal with the customs declaration (Faroe Seafood, paragraph 88).”

Competent authorities are not treated as making an error if they have been misled. In Cyproveg Ltd v HMRC, TC06722 (“Cyproveg”), the First-tier Tribunal (Judge Brooks and Ms Akhtar) stated as follows at [105] to [107] (which, whilst not binding, we adopt as an accurate summary of the law):

“[105] It is clear from Faroe Seafoods (at [89] to [92]) that the term “competent authorities” is not confined to the customs authorities determining the application for waiver of the post-clearance recovery but also includes customs authorities entrusted by the EU with the task of furnishing relevant information.

[106] However, it is only errors that are attributable to acts of the competent authorities that confer entitlement to the waiver of post-clearance recovery of customs duties (see Case C-348/89 Mecanarte v Chefe do Serviço da Conferência Final da Alfândega [1991] ECR I-3277, CJEU at [23]; and Illumitrónica at [42]).

[107] Those customs authorities must have created a legitimate expectation on the part of the importer (see Faroe Seafoods at [91]). The competent authorities cannot be regarded as having made an error if they have been misled in relation to the goods by incorrect declarations on the part of the exporter, whose validity they are not obliged to check or assess. In such circumstances, it is the person liable who must bear the risks arising from a commercial document which is found to be false when subsequently checked (see Faroe Seafood at [92]).”

The term “good faith” has a restricted meaning in this context. It does not mean simply the absence of deception, but also requires the exercise of appropriate diligence and due care. In Staatsecretaris van Financien v Heuschen & Schrouff Oriental Foods Trading BV (Case C-375/07) [2008] ECR I-8599 the ECJ compared the “good faith” provisions in Article 220 of the Customs Code with the requirement of, “no deception or obvious negligence” in Article 239 and found that the same were to be treated as the same. The ECJ stated as follows at [57] to [59]:

“[57] It must be stated at the outset that the procedures provided for in Articles 220 and 239 of the Customs Code pursue the same aim, namely to limit the post-clearance payment of import and export duties to cases where such payment is justified and is compatible with a fundamental principle such as that of the protection of legitimate expectations (see Case C-250/91 Hewlett Packard France [1993] ECR I-1819, paragraph 46, and Söhl & Söhlke, paragraph 54).

[58] It follows that the conditions to which the application of those articles is made subject, that is to say, in particular, that no obvious negligence may be attributed to the person concerned in the case of the second indent of Article 239(1) of the Customs Code and that no error has been made by the customs authorities which could reasonably have been detected by the person liable in the case of Article 220 of the Customs Code, must be interpreted in the same manner (see, to that effect, Söhl & Söhlke, paragraph 54).

[59] Consequently, as the Court has previously held, in order to determine whether or not a trader has demonstrated ‘obvious negligence’, within the meaning of the second indent of Article 239(1) of the Customs Code, it is appropriate to apply by analogy the criteria used in the context of Article 220 of the Customs Code to ascertain whether or not an error committed by the customs authorities was detectable by a trader (see , Söhl & Söhlke, paragraphs 55 and 56, and Case C-156/00 Netherlands v Commission [2003] ECR I-2527, paragraph 92).”

The burden of proof in such cases is upon an appellant by virtue of section 16(6) of the Finance Act 1994.

We make the following findings of fact. In doing so, we bear in mind that the burden of proof is upon Kilo and that the standard of proof is that of the balance of probabilities. We have considered the documentary evidence, the written statement on behalf of Kilo (Mr Mark Taylor), and the witness statements on behalf of HMRC (Mr Steven Holder, Mr David Halliwell, Mr Vesa Lehtonen, and Mrs Audrey Warburton). We heard oral evidence from Mr Taylor and from Mr Lehtonen. We note at the outset that both Mr Taylor and Mr Lehtonen were genuine and helpful witness who gave their evidence in a credible manner and were clearly seeking to assist the Tribunal.

Miss Kisiel’s submissions in respect of the ADD Appeal can be summarised as follows:

Mr Carey’s submissions in respect of the ADD Appeal can be summarised as follows:

We find that Kilo has failed to establish that HMRC was not entitled to impose the ADD.

For the reasons set out in paragraphs 18 to 20 above, the operative regulations in the present case were the Definitive Regulation and the Continuation Regulation. Whilst we accept that the Extension Regulations were not retrospective, HMRC does not rely (and does not need to rely) upon the Extension Regulations.

For the reasons set out in paragraph 28(14) above, we find that the citric acid originated in China. There is no obligation upon HMRC to establish how any different certificates of origin came about as it is the actual origin rather than the declared origin which causes the ADD to be applied in the present case.

In any event, the certificates of origin are not capable of changing where the citric acid originated from. We agree with Mr Carey’s reliance upon Lagura and Pascoal. As such, the fact that Kilo relied upon incorrect certificates of origin has no bearing upon the imposition of the ADD. Indeed, Miss Kisiel has not explained any legal basis for any contrary view.

We therefore dismiss the ADD Appeal.

Miss Kisiel’s submissions in respect of the Repayment Appeal can be summarised as follows:

Mr Carey’s submissions in respect of the Repayment Appeal can be summarised as follows:

We find that Kilo has failed to establish an entitlement to repayment.

The relevant legal principles in respect of the Repayment Appeal are set out at paragraphs 23 to 27 above. We note that it is Article 119(1) which is applicable to the present case; Article 119(2) deals with reduced or zero-rated duty, and Article 119(3) deals with preferential treatment of goods. Each of the requirements set out in Article 119(1) must be made out by Kilo in order to succeed. As set out below, we find that Kilo has not established each (or, indeed, any) of the requirements.

As regards the issue as to whether there was an error of a competent authority, we find as follows:

As regards the issue as to whether Kilo could not reasonably have detected the error, we find as follows:

As regards the issue as to whether Kilo acted in good faith, we find as follows:

We therefore dismiss the Repayment Appeal.

It follows that, for the reasons which we have set out above, we dismiss both the ADD Appeal and the Repayment Appeal.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.