H Tideswell & Sons Limited v The Commissioners for HMRC

Directive 2008/118 EC (“the Directive”) laid down general arrangements for harmonising excise duty across the EU.

Article 7 of the Directive provides that:

Article 8 of the Directive states:

In Case C-325/99 G van de Water v Staatsecretaris van Financien [2001] ECR I-5163 the ECJ noted, at [41], in relation to the predecessor directive to the ED, that national authorities must ensure that an excise duty tax debt is collected. Following van de Water the Upper Tribunal has held that it is the duty of national authorities to ensure that excise duty is levied and paid where goods in respect of which duty has not been paid are found to be circulating within the EU. Otherwise, there will be a distortion of the internal market if goods in respect of which duty has not been paid are circulating freely alongside goods where duty has been paid; HMRC v B&M Retail Ltd [2016] UKUT 429 (TCC) (“B&M”), at [115], Davison & Robinson Limited v HMRC [2018] UKUT 437 (TCC) (“Davison”), at [63].

In domestic law cigarettes are excise goods subject to excise duty under section 2(1) of the Tobacco Products Duty Act 1979.

The Finance (No. 2) Act 1992 provides the authority for regulations to implement the Directive in the UK. Those regulations are the Excise Duty (Holding, Movement and Duty Point) Regulations 2010 (“the Regulations”)..

Under regulation 5 of the Regulations there is an excise duty point at the time when excise goods are released for consumption in the United Kingdom.

Under regulation 6:

Under regulation 10(1) the person liable to pay the duty when excise goods are released for consumption by virtue of regulation 6(1)(b) “is the person holding the excise goods at that time”. Under regulation 10(2) “any other person involved in the holding of the excise goods is jointly and severally liable to pay the excise duty with the person specified in [Reg.10(1)]”.

The concept of “holding” goods appears at numerous points in the Directive and the Regulations. There has been a series of domestic authorities in relation to “holding” that were canvassed in Dawson’s Wales Ltd v HMRC, [2019] UKUT 296 (TCC). However, those authorities have been overtaken.

In HMRC v WR (Case 279/19) the CJEU addressed Article 33 of the ED in relation to excise goods which have already been released for consumption in one Member State and are held for commercial purposes in another Member State. The CJEU held that Article 33 of the Directive must be interpreted as meaning that a person who transports, on behalf of others, excise goods to another Member State, and who is in physical possession of those goods at the moment when they have become chargeable to the corresponding excise duty, is liable for that excise duty, even if that person has no right to or interest in those goods and is not aware that they are subject to excise duty or, if so aware, is not aware that they have become chargeable to the corresponding excise duty. Actual or constructive knowledge of the smuggling of goods is therefore irrelevant to liability to excise duty (HMRC v Perfect [2022] EWCA Civ 330, at [23]). In other words, there is no “innocent agent” exception in relation to “holding” for the purposes of liability to excise duty. Tideswell’s appeal originally included an argument that it was an “innocent agent” and so it was not fair, proportionate or reasonable to assess it. That argument has been abandoned in view of the Court of Appeal decision in Perfect.

Section 139 CEMA permits seizure by HMRC of anything reasonably suspected to be liable to forfeiture. Paragraph 3 of Schedule 3 to CEMA provides that a challenge to a seizure must be made within a month. In default of such a challenge the goods are deemed by paragraph 5 of Schedule 3 to CEMA to have been duly condemned and forfeited.

Under section 12 (1A) Finance Act 1994 (“FA94”) HMRC may assess excise duty on a person where it appears to them (a) that any person is a person from whom any amount has become due in respect of any excise duty, and (b) that they can ascertain that amount.

Although section 12 provides that HMRC “may” raise an excise duty assessment, the CJEU in Perfect (at [66]) made it clear that HMRC have no discretion here. They must assess the person they find holding the goods, if that is the only duty point which can be established. The CJEU commented that, although fairness and proportionality are cornerstones of both EU law and the common law, the underlying policy of the Directive (that the excise duty due should be collected) meant that there was strict liability. This was discussed further by the FTT (Judge Scott) in Paul Eveleigh v HMRC, [2023] UKFTT 256 (TC), which also held that an assessment could not be challenged on the basis that it was disproportionate (even where the goods had been forfeited and Mr Eveleigh’s vehicle had been seized) and that an assessment for excise duty where goods are forfeit is not a penalty.

It is clear that, as the concept of holding of a product subject to excise duty outside a suspension arrangement without the duty having been paid constitutes a “release for consumption” (G van de Water v Staatsecretaris van Financien (Case C-325/99)), there can be more than one release for consumption in respect of the same goods. However, there clearly cannot be multiple liabilities to excise duty in respect of the same goods and it is accepted that there can only be one assessable duty point.

It is now accepted as a matter of law that HMRC is obliged to assess against the earliest duty point they can establish on the evidence they have. In Davison & Robinson Ltd v HMRC, [2018] UKUT 437 (TCC), the issue before the Upper Tribunal was whether it is open to HMRC to assess a person who is found to be holding excise goods, in respect of which the holder cannot demonstrate that the duty has been paid, in circumstances where a prior event which would entitle HMRC to make an assessment on somebody else must have occurred, but where, when, how and by whom that event occurred cannot be established. They said:

HMRC cannot make an assessment until it has the necessary information to do so. In the absence of any relevant information in relation to any prior duty point, HMRC must assess the person it finds to be holding the goods. At [67] the Upper Tribunal observed:

This does not mean that a person found holding goods will always be liable to excise duty. What it does mean is that quite a lot needs to be established before the holder can successfully challenge an assessment. As the Upper Tribunal observed in Dawson’s (Wales) Ltd v HMRC, [2019] UKUT 296 (TCC) (at [149]):

The Court of Appeal agreed ([2023] EWCA Civ 332 at [84] and [94]) that factors (1), (3) and (4) were factors to be taken into consideration where an assessment is challenged on the basis that an earlier excise duty point can be established. DWL did not take issue with factor (2). The Court of Appeal also confirmed (at [94]) that, in the circumstances of that case, the burden of proof is on DWL.

Up to this point, there is broad agreement between Tideswell and HMRC on the way the law operates. In particular, Tideswell accepts that, as it was holding the goods, it is the person to be assessed unless an earlier duty point can be identified and that it bears the burden of proof of that. However, Tideswell goes on to assert that, while the burden of discharging the assessments remains on it throughout, the evidential burden on whether there was an earlier excise duty point has shifted to HMRC. This is because HMRC is the only party which has the evidence on this issue available to it and which HMRC have chosen not to adduce.

This difficulty (that an appellant carries the burden of proof of an earlier duty point but HMRC is likely to be in a much better position so far as having access to evidential material is concerned) is one that has exercised the Tribunal in a number of cases. In Paul Murphy v HMRC, [2021] UKFTT 204 (TC), the Tribunal discharged an assessment to excise duty on a “mere courier” (albeit one who knew that the goods he was carrying were counterfeit goods) on the basis that the excise duty rules “must be fair and proportionate in their effect”, that levying excise duty on seized goods “operates as a deterrent and penalty [and a]ll penalties must be fair and proportionate” and, as “[t]here must have been an earlier excise duty point … but HMRC failed to carry out a proper investigation to establish whether such an appropriate excise duty assessment could be properly raised”, an assessment on Mr Murphy alone would not be fair or proportionate.

This case has been the subject of some criticism. In Charlene Hughes v HMRC, [2022] UKFTT 400 (TC), the Tribunal noted that Murphy predated the CJEU/Court of Appeal decisions in WR/Perfect, which make it clear that the imposition of strict liability does not offend the principles of fairness and proportionality. It is also inconsistent with Paul Eveleigh, where the Tribunalheld that an assessment could not be challenged on the basis that it was disproportionate (even where the goods had been forfeited and Mr Eveleigh’s vehicle had been seized) and that an assessment for excise duty where goods are forfeit is not a penalty. The decision in Murphy is also inconsistent with the Upper Tribunal decision in Butlers Ship Stores Limited v HMRC, [2018] UKUT 58 (TCC), where Lady Wolffe held that the existence of strict liability for excise duty was inimical to the existence of any discretion on HMRC’s part and also that, where appeals under section 16(5) of the Finance Act 1994 (which is the case with this appeal) are concerned, it is no part of the tribunal’s role to consider the reasonableness of the decision under review, in contrast to the position with appeals under section 16(4). Mr Watkinson submitted that Murphy was shot through with error and should be ignored. Ms Choudhury did not seek to defend that decision or to rely on it before us, nor did she suggest that HMRC had any discretion when it came to assessing excise duty or that there was any scope for us to review the reasonableness (or not) of their decision to assess Tideswell.

Whilst the decision in Murphy may be questionable, the concerns which clearly exercised the Tribunal in that case are not. In B & M Retail Ltd v HMRC, [2016] UKUT 429 (TCC), the Upper Tribunal made these observations (at [153]):

To compound the problem, the more of an “innocent agent” someone in Tideswell’s position is, the less likely they are to be able to identify an earlier duty point. We should be clear, as we were with Ms Choudhury and Mr Watkinson, that we too were exercised by this concern.

This brings us to Ms Choudhury’s submissions on the shifting of the evidential burden. Because this was Tideswell’s only real ground in the Liability Appeal and the issue had not been developed in skeleton arguments, we asked for written submissions from Ms Choudhury and Mr Watkinson on the evidential burden (so that we could be completely clear about their arguments) and also on whether our concern about appellants in Tideswell’s position could be addressed through disclosure requirements under rules 5(3)(d) or 16(1) of the Tribunal Procedure (First-tier Tribunal) (Tax) Rules (the “FTT Rules”). Rule 5(3)(d) allows the Tribunal to make a direction to require a person to provide “documents, information or submissions”, and rule 16(1) allows it to require a person to attend as a witness or to answer questions or produce documents.

Ms Choudhury describes the evidential burden as a principle of the law of evidence as opposed to a more general rule of law. In Brady v Group Lotus plc [1987] STC 635, Mustill LJ (in the majority in relation to the legal burden of proof) stated at 643f-h:

The evidential burden was considered by the FTT in Royal Borough of Kensington & Chelsea v HMRC [2014] UKFTT 729 (TC), where the tribunal was referred to the Court of Appeal’s decision in Wood v Holden, [2006] EWCA Civ 26, in which the Court upheld Park J’s decision that, after the appellants had produced evidence to show that the amendments made to their self-assessments were wrong (because the company whose shares they had disposed of was resident in the Netherlands), the evidential burden passed to HMRC (who contended that the company in question was UK resident). Other examples of the FTT accepting that the evidential burden had shifted from one party to the other, notwithstanding the legal burden of proof, include Distinctive Care Ltd v HMRC [2016] UKFTT 764 (TC) at [33] (citing RKBC) and Wroe & ors v HMRC [2022] UKFTT 143 (TC) at [107].

In response to this, Mr Watkinson submits that the legal and evidential burden of proof in this appeal is on Tideswell to establish the four factors necessary for there to be an earlier duty point. He submits that Tideswell has not established any of those points. Instead, Tideswell seeks to side-step that burden, and place it on HMRC, firstly by asserting that the evidential burden of proof somehow shifted, and secondly by asserting that HMRC have the evidential burden of proof because they are the only party which has the evidence on this issue available to it and they have chosen not to adduce that evidence.

On the evidential burden generally, Mr Watkinson submits that where a court or tribunal does consider a shift in evidential burden (i) that requires a prima facie case to be established by the party with the burden of proof, and (ii) that cannot disguise the fact that the burden of proof remains on that party throughout. He says that is apparent from the passage in Brady cited by Ms Choudhury (and reproduced above). Here, Tideswell has not established by its evidence even a prima facie case of any of the four factors needed to find an earlier duty point. Absent such a prima facie case being made out there can be no shift of the evidential burden to HMRC.

As to Tideswell’s second assertion, that the evidential burden was always on HMRC because they were the only party with evidence on the four factors, Mr Watkinson submits:

In response to Mr Watkinson’s final point, Ms Choudhury submitted that no application for disclosure was made under rules 5(3)(d) or 16(1) of the FTT Rules because of assurances given by HMRC that they would be providing the further information in respect of the existence of an earlier excise duty point Tideswell’s legal representatives had asked for. This was meant to have been in SP’s witness statement, but when filed it did not cover the relevant points. When Tideswell’s representatives queried this, it led to HMRC applying to admit CG’s second witness statement. Ms Choudhury submits that asking HMRC to disclose any information it considered would show the existence of an earlier excise duty point was a reasonable and proportionate course of action and a necessary precursor to making an application for specific disclosure. In the event, this explanation was not provided at any stage prior to the hearing, despite HMRC indicating their willingness to respond to Tideswell’s queries and was only provided by CG in the course of his oral evidence, of which Tideswell had no prior warning.

RKBC involved a claim by RKBC under section 80 Value Added Tax Act 1994 to recover amounts mistakenly paid as VAT on building control fees. It was accepted by HMRC that local authorities were not liable for VAT on such fees charged in relation to commercial properties and two methods were agreed for processing claims for overpaid VAT. The method (“Method 2”) RKBC was using worked like this:

The FTT held that this method operated as a waiver of RKBC’s section 80 right to recover overpaid VAT only in respect of claims actually made and the issue that gave rise to, in the context of deciding what claims RKBC could now make in its own right, was whether the burden was on RBKC to prove what claims were not made (which HMRC contended) or on HMRC to prove what claims were made (as RBKC contended), and whether the burden of proof was discharged. The particular problem in that case was that, as claims were made directly to HMRC by third parties, RKBC never knew what claims had been made. Claims were made to HMRC, but HMRC had destroyed all its relevant records and evidence. RKBC argued that HMRC were relying on the “Method 2 agreement” as a defence to RKBC’s claim, and so the burden of proof lay on it. Alternatively, RKBC argued that, even if the legal burden remained with RBKC on this point (to justify the repayment claims it was making), the evidential burden had shifted to HMRC (it being common ground that RBKC had discharged its own initial burden to prove the amounts mistakenly paid as VAT). Under the heading “Discussion: burden of proof”, the FTT observed:

The FTT in RKBC referred to the decision of the Court of Appeal in Wood v Holden, [2006] EWCA Civ 26. As summarised by the FTT, the taxpayers had entered into a scheme to mitigate the charge to capital gains tax under section 86 of the Taxation of Chargeable Gains Act 1992 on the disposal by the taxpayers of their company. The case turned on the residence of a company, Eulalia, incorporated in the Netherlands. HMRC had charged capital gains tax, finding that Eulalia was resident in the UK for tax purposes. The Special Commissioners had dismissed the taxpayers’ appeal, holding that the taxpayers had not established that Eulalia was not resident in the UK for tax purposes. The taxpayers appealed to the High Court, which reversed that finding, upholding the taxpayers’ appeal. HMRC appealed to the Court of Appeal, which found for the taxpayers.

The Special Commissioners in Wood v Holden, appear to have decided the case (at least in part) on the basis that the taxpayers had not satisfied them that Eulalia was not UK tax resident. Park J thought that they were wrong to have done so in the light of the state of the evidence before them. The Court of Appeal agreed, holding:

The Court of Appeal held that, although there can be exceptional cases where a judge can only decide a case on the basis that the party on whom the burden of proof lies has failed to discharge that burden, this was not one of those cases.

Although Wood v Holden was prayed in aid in RKBC in reaching its conclusion that the evidential burden had shifted (see paragraph [63] of the RKBC decision), we see RKBC as an example of the evidential burden shifting for a different reason. As we have just seen, Park J and the Court of Appeal considered that Mr and Mrs Wood had done enough to raise a case that Eulalia was not UK resident, such that (although the burden of proof always rested with them) the evidential burden had shifted to HMRC (so that they had to displace the prima facie case the Woods had established). RKBC, on the other hand, needed to establish its entitlement to reclaim overpaid VAT. To do that, it needed to show (as it had done) that it had overpaid VAT and then it needed to show that no reclaims had been made by businesses in relation to the VAT it was reclaiming. Although we could not find an express statement to this effect, the FTT seem to have accepted that the burden of proof was on RKBC to establish this. Apart from anything else, if they had thought that the burden of proof was on HMRC to establish that claims had been made by businesses, they would have said so and the evidential burden point would then not have been irrelevant. The FTT clearly seem to have accepted that the burden of proof (that no relevant claims had been made) was on RKBC, but the evidential burden had shifted to HMRC; see, for example, the comments at [63] and [66]-[67]. As HMRC could not produce any evidence (because they had destroyed it), that was the end of the matter.

Looking at the other cases Ms Choudhury cited, Distinctive Care Ltd v HMRC, [2016] UKFTT 764 (TC), was concerned with a claim for costs on the basis of unreasonable behaviour by HMRC. One question relevant to the unreasonable behaviour issue was when HMRC’s Central Policy team (“CenPOL”) had changed their view on a particular issue. In relation to this, Judge Mosedale commented (at [33]):

Wroe & ors v HMRC, [2022] UKFTT 143 (TC), concerned an aspect of the transactions in securities legislation, namely who must bear the burden of proof as to whether the purpose of the taxpayer in entering into a transaction was to obtain a tax advantage. In relation to this, Judge Brannan observed (at [104]-[109]):

Although Wood v Holden was cited as authority for its decision by the FTT in RKBC, it seems clear to us that there are (at least) two quite separate strands to the “shifting of the evidential burden”. The first is the situation in Wood v Holden itself, where the person with the burden of proof has done enough to raise a case that they can say to the judge or tribunal, “What more can you expect from us? The burden must now pass to my opponent to produce some material to show that, despite what appears from everything which we have produced, the position is not what it so far appears to be.”

Quite separate, it seems to us, is the situation where the burden of proof is on one party but the evidence is solely (or possibly primarily – see Wroe at [107]) in the hands of their opponent. This, of course, is the position that obtained in RKBC, Wroe and Distinctive Care. In all these cases the FTT accepted that, although one party (the appellant in RKBC and Distinctive Care, but HMRC in Wroe) had the legal burden of proof, the “evidential burden” was on the other. The shifting of the evidential burden in such cases would appear to be the result of an entirely separate approach by the courts. This is touched on by the FTT in RKBC at [53] when they observed:

Edwards is a criminal case. The appellant was convicted of selling intoxicating liquor without a licence. At trial, the prosecution proved that he had sold liquor but not that he did not have a licence. The appellant appealed, arguing that the prosecution needed to prove that he did not have a licence. The Court of Appeal disagreed, holding that, where statute made an act an offence, save in specified circumstances or by persons of a specified class, the prosecution did not need to prove that the exception did not apply. In such cases, the legal burden of proof (emphatically not, the “evidential burden”) rests on the defendant and this “does not depend on either the fact, or the presumption, that the defendant has peculiar knowledge enabling him to prove the positive of any negative averment. As Wigmore pointed out in his great treatise on evidencethis concept of peculiar knowledge furnishes no working rule. If it did, defendants would have to prove lack of intent.” (per Lawton LJ at p1095). Earlier (at p1091) Lawton LJ, commenting on a suggestion that there was “a general rule, that if a negative averment be made by any one party, which is peculiarly within the knowledge of the other, the party within whose knowledge it lies, and who asserts the affirmative is to prove it, and not he who avers the negative”, observed:

Beyond the submissions recorded above, we did not have the benefit of detailed argument on the extent to which the evidential burden can shift in cases where the party who does not have the burden of proof holds all the cards (or all the cards worth having) so far as the evidence is concerned. Certainly, the FTT seems to have accepted that this can occur, although neither Wood v Holden (which deals with a different aspect of evidential burden shifting) nor the primary authority cited in the edition of Halsbury discussed by the FTT in RKBC (Edwards – which appears to decide that the legal burden of proof shifted to the defendant because he was seeking to rely on a statutory exception and said in terms that this was nothing to do with the evidential burden) seem to provide much (if any) authority for, or guidance on, this aspect of evidential burden shifting. The current edition of Halsbury contains a statement (at paragraph 700 of Volume 11) to broadly the same effect as the passage cited in RKBC, although it would appear to be more nuanced and guarded. It reads as follows:

In this context, we remind ourselves of what seem to us to be some guiding principles:

Because of the policy considerations discussed above, there can be absolutely no question of any shifting of the evidential burden to HMRC operating in a way which creates a risk of a person in Tideswell’s position being able to challenge an assessment without it being shown that there is (not just that there might be) a particular earlier duty point against which HMRC can assess.

There can be no doubt that there was an earlier duty point in this case. Over 2.3 million Mayfair Blue cigarettes do not turn up as a job lot in the Black Country by magic. No one suggested that Tideswell manufactured them or transported them to Stoke-on-Trent. It is abundantly clear, however, that this is not sufficient. It is not sufficient for someone in physical possession of excise goods who was assessed for excise duty merely to point to the chain of supply and contend that there must have been an earlier release for consumption and a person in de facto or legal control of the goods before them and, accordingly, that they are not liable; Dawsons in the Court of Appeal at [76].

It seems to us that there are two, quite separate, questions here and we should analyse where the burden of proof (or evidential burden) lies separately.

The first question focuses on the evidential material HMRC hold. It is clear from Davison & Robinson (at [79]) that HMRC is required to “assess against the earliest point in time at which they are able to establish, on the evidence before them, that excise goods have been held outside a duty suspension arrangement.” Before HMRC can assess Tideswell, therefore, it must be satisfied that it does not hold evidence which would enable it to establish an earlier duty point. If it does, it must assess against that duty point rather than Tideswell, even if Tideswell might be more likely to have the financial resources to meet the assessment. HMRC does not have to go looking for evidence, at least so far as this point is concerned, but it does need to form a view on the evidence it holds.

As a general rule, one might expect the burden of proof on this point (that HMRC does not hold evidence which would enable it to establish an earlier duty point) to lie on HMRC. By assessing Tideswell, HMRC is asserting that it is not in a position to assess against an earlier duty point and, as a general rule, the burden of proof lies upon the party who substantially asserts the affirmative of the issue; Phipson on Evidence (20^th edition) paragraph 6-06. Put another way, HMRC not holding evidence sufficient to prove an earlier duty point is an essential part of HMRC’s case, so the burden of proving that allegation rests on it. The difficulty with that position is that this appeal is brought under section 16 Finance Act 1994 (“FA 1994”) and section 16(6) FA 1994 provides that “it shall [but for certain exceptions (none of which are relevant here)] be for the appellant to show that the grounds on which any such appeal is brought have been established”. In other words, if one of an appellant’s grounds of appeal is that HMRC have evidence sufficient to establish an earlier duty point, the burden of proof is on the appellant to establish that HMRC has such evidence, not on HMRC to establish that it does not.

In RKBC and Distinctive Care the FTT held that there might be some shifting of the evidential burden to HMRC, or the burden of proof might sit with HMRC from the outset, because it was the only entity which had (or should have had) relevant evidence. There is an obvious parallel between this issue (What does HMRC know?) and the position in Distinctive Care (When did HMRC change its policy?). They are both questions only HMRC knows the answer to. Finding that there is a shifting of the evidential burden to HMRC on this point would not run counter to the policy issue (of not releasing one assessment without another duty point to take its place) identified as paramount in the cases, nor should it be difficult for HMRC to comply with. All they would be required to do is explain how they reached a conclusion (that they did not have material sufficient to establish an earlier duty point) they are required to have reached before assessing a person found holding excise goods on which duty should have been (but had not been) paid.

Despite all this and with some reluctance, we have concluded that there cannot be any shifting of the burden of proof or of the evidential burden to HMRC. This is because of the clear statutory provision in section 16(6) FA 19994, that it is for the appellant to show that its grounds of appeal have been established. Neither of the two FTT cases we have just referred to involved the FTT reaching a conclusion on where the evidential burden lay from the outset in the face of a clear, identified statutory provision laying the burden of proof on a particular party. As we have seen, even if the evidential burden (or the burden of proof) can in some circumstances attach itself from the outset to a party who holds all (or by far the better) cards, this is not an absolute rule and it must yield to the clear words of statute. The evidential burden might shift in the course of proceedings (in line with the approach in Wood v Holden), if an appellant can establish a prima facie case that HMRC held evidence sufficient to establish a particular earlier duty point, but the burden of establishing this ground of appeal (as with all its grounds of appeal) lies where the statute puts it, firmly on the appellant.

The second (and quite separate) question is whether there actually is an earlier duty point, whether or not HMRC can work it out on the basis of the evidence they hold. It is clear on authority that the burden of proof here is on Tideswell. This is only to be expected; an appellant asserting that there is an earlier duty point would bear the burden of proving that for the reasons discussed in the preceding paragraph. The Upper Tribunal and the Court of Appeal have all considered where the burden of proof lies on the question of establishing an earlier duty point in circumstances such as this. It cannot have escaped their notice that HMRC might very well know far more about the chain of events that led to a person being found holding excise goods than that person, especially if they were an “innocent agent”. We know (see [50] above) that this point was clearly in the minds of the Upper Tribunal in B & M Retail. This notwithstanding, there is no caveat in the various judgments and decisions as to where the burden of proof lies, nor is it qualified by reference to a (differently situated) evidential burden. Quite apart from the fact that requiring this would effectively be asking HMRC to prove a negative (that there is no earlier duty point), which (as the FTT noted in RKBC) is far from straightforward, and run counter to section 16(6) FA 1994, this would bring the policy risk of HMRC being left with no assessment back into play. Finally, as Mr Watkinson observed, whilst HMRC might be in a better position than an appellant when it comes to gathering evidence about where illicit goods have come from, this will by no means always be the case and they will certainly not know enough to establish an earlier duty point. If they did, they should not have assessed the appellant in the first place.

We do not find anything in the three FTT cases we reviewed which addressed the evidential burden to disturb our conclusion. They addressed the location of the evidential burden in far simpler circumstances and without an equivalent to our overriding policy concern. In Wroe HMRC had already made out a prima facie case for what they accepted they were required to prove, so that case could be seen as an outworking of the Wood v Holden basis for evidential burden shifting. RKBC required HMRC to prove a positive (which claims had been waived) when they had (or should have had) all the evidence and Distinctive Care simply required HMRC to identify when their policy had changed, which should not have been difficult and which only they would know.

For all these reasons, we are satisfied that the burden of proof is on Tideswell to establish an earlier assessable duty point and there is no “shifting of the evidential burden” to HMRC.

We pause to observe that people in Tideswell’s position are not without protection on these points. Firstly, as the Upper Tribunal observed in B & M Retail, judicial review may be available in appropriate cases in relation to any failure by HMRC to investigate whether any earlier assessable duty point exists.

Secondly, although this Tribunal has no supervisory role in relation to HMRC’s investigations, it does have power under rule 5(3)(d) of the FTT Rules to make a direction to require a person to provide “documents, information or submissions”, and under rule 16(1) to require a person to attend as a witness or to answer questions or produce documents. As Mr Watkinson fairly volunteered on behalf of HMRC, it is difficult to see circumstances in which a Tribunal would refuse an application for disclosure of evidence in HMRC’s possession that might help to establish an earlier duty point where it was properly made. Where an appellant believes that, despite requests, HMRC has not disclosed such material, that would be an obvious application for an appellant to make.

Even when she and Mr Watkinson were asked for their written submissions on the shifting of the evidential burden and the safeguards offered by rules 5(3)(d) and 16(1) of the FTT Rules, Ms Choudhury did not ask the Tribunal to consider directing further disclosure from HMRC and deferring its decision until HMRC’s responses could be considered.

Turning to the question whether HMRC hold sufficient evidence to establish an earlier duty point, Ms Choudhury’s complaint is that there is a significant period of time, from the date of the raid in May to the time when SP started his investigation, which is unaccounted for. She does not question CG’s evidence that, as at the date of the raid, HMRC did not have sufficient evidence to establish an earlier duty point. Similarly, she does not question the evidence SP gave about the nature of his investigation. However, she says, we do not know anything at all about what (if anything) happened in the period between the winding down of Operation Margaret (in the middle of May) and SP starting his investigation based on the information sent to him. In particular, we do not know whether FIS carried out any further investigations or made any discoveries.

Ms Choudhury accepts that there is a presumption of legality here, that is to say that we should start with the assumption that HMRC, having raised an assessment on Tideswell, have done so lawfully. She does not submit that HMRC have deliberately acted outside the law, but simply that no one has looked at the entire chain of evidence in the round. She noted that HMRC were aware of Mr Woodcock’s first visit to Tideswell’s premises and she says that leaves us with a “gaping hole” in the case. SP’s investigations focused on Tideswell, and, she submits, we simply do not know what else there is to be found.

We agree with Ms Choudhury that HMRC’s evidence could have been more completely and holistically presented. In particular, it would have been helpful if someone could have explained what (if anything) HMRC (FIS in particular) did in the gap period, and also if someone could have explicitly confirmed that they had looked at all of the evidence the different parts of HMRC held and had concluded that HMRC overall (not just any particular individual or operational group) did not have evidence in their possession sufficient to establish an earlier duty point. We paused in our deliberations on this point to consider whether we should, of our own motion, make an order requiring HMRC to produce evidence along these lines before making our decision, but we considered that it was unnecessary to do so as we had sufficient material to enable us to reach a conclusion on this issue.

We do not consider that there are “gaping holes” in HMRC’s case. On the contrary, we are satisfied on the balance of probabilities, and find as a fact, that HMRC did not have in their possession evidence sufficient to enable them to establish an earlier duty point. We have reached this conclusion for the following reasons:

We have not seen anything which suggests to us that HMRC were in possession of material which would enable them to identify an earlier duty point. They had focused their enquiries on Mr Woodcock and what they learned, as recorded in SP’s letter to Mr Woodcock, clearly did not lead them anywhere. Again, whether HMRC could have discovered more from Mr Woodcock if they had tried harder is beside the point so far as this issue is concerned. The question we are focusing on is what HMRC could deduce from the material they had, not what they might have found out if they had pursued their enquiries in a different way. Unless FIS were pursuing an entirely different lead, which had produced useful evidence, entirely separate from all the evidence produced to us and not included in the material given to SP to form the basis of his investigation, we cannot see how HMRC as an institution could be in possession of the evidence they would need to establish an earlier duty point. We should stress that Ms Choudhury did not suggest that FIS had conducted such an enquiry or found such evidence, and we have already concluded that, given the purpose of SP’s group, it is difficult to see why FIS would pass an incomplete case over to them or not tell them of anything relevant.

We have held that it is for Tideswell to establish that HMRC held evidence sufficient to establish an earlier duty point. They have not done so. On the contrary, the evidence is such that, even if we are wrong and the burden were on HMRC to establish (on the balance of probabilities) that they did not hold sufficient evidence, we would have concluded that they had satisfied that burden.

So far as the second question (whether there is an earlier duty point) is concerned, the burden of proof lies entirely on Tideswell to prove a particular earlier duty point which HMRC can assess against. Here, whilst there clearly must have been an earlier duty point, no evidence has been led that goes anywhere near establishing any of the four factors required to establish a particular earlier duty point, let alone all of them.

The penalty was charged under Schedule 41 Finance Act 2008 (“Schedule 41”). Paragraph 4(1) of Schedule 41 provides:

Under the heading “degrees of culpability”, paragraph 5(4) reads:

Paragraph 12 of Schedule 41 is headed “Reductions for disclosure” and sub-paragraph (1) provides that, in a case such as this, which relates to a “domestic matter”, the possible reductions are set out at sub-paragraph (13). Paragraph 12(3) then reads:

Paragraph 13 of Schedule 41 then sets out the mitigation available for the “quality of the disclosure”, namely for “telling, helping and giving” in the context of different types of penalty. The penalty was calculated on the basis that Tideswell’s behaviour was deliberate, but not concealed, it involved a domestic matter and the disclosure was prompted. This resulted in a penalty liability of between 35% and 70% of the potential lost revenue (“PLR”). HMRC considered the quality of disclosure and found that a reduction to 38.5% of the PLR was appropriate. The reduction comprised a 20% reduction for telling, a 30% reduction for giving and a 40% reduction for helping. Ms Choudhury did not challenge how HMRC had calculated the reduction, nor did she suggest that a further reduction should be made under paragraph 14 (special circumstances).

The meaning of “deliberate” in Schedule 41 was considered by this Tribunal in Hare Wines Limited v HMRC, [2023] UKFTT 25 (TC), where the Tribunal concluded (at [131]) that the interpretation of “deliberate” should reflect the decision of the Supreme Court in HMRC v Tooth, [2021] UKSC 17, in relation to the meaning of that expression in Schedule 24 to the Finance Act 2007, and accordingly “a person has acted “deliberately” if he intentionally acquires possession of goods knowing that the payment of duty is outstanding, and intentionally does not pay that duty.” The test for “deliberate” behaviour is a subjective one, which requires proof that Tideswell actually knew that the goods were excise goods on which duty should have been (but had not been) paid.

It was common ground that the concept of knowledge/knowing in this context includes what is often referred to as “Nelsonian blindness”. This was explored by the Upper Tribunal in CPR Commercials Ltd v HMRC, [2023] UKUT 61 (TCC) at [23]-[24]:

Both Mr Watkinson and Ms Choudhury accept that “Nelsonian blindness” is also subjective, in that it requires a deliberate, conscious decision not to investigate whether a situation an individual has good reason to believe in is in fact the case. Not appreciating, and thus not investigating, a risk (however obvious it might appear to others) is not enough.

As far as Tideswell’s behaviour is concerned, Mr Watkinson started by asking why those looking to store the illicit cigarettes (the “crooks” as he referred to them, and we will do the same) chose to store their cigarettes in Tideswell’s premises. It was certainly not geographical convenience. Mr Woodcock was distributing from his base in South Yorkshire, and Tideswell’s premises are not convenient for that. The cigarettes were worth over £1m and the crooks would be running a big risk if they located the cigarettes with someone who either did not know what was going on and was happy to be involved or who could be relied on not to ask any questions, however red the flags are that are fluttering and however many there are. There was no other reason to choose Tideswell.

Looking at the particular features of the case, he noted that we have someone called “John” turning up. He does not give his name and no one asks him for it. Then Tideswell get an email from someone else (Peter McGrath) at a company they had never heard of before. No address is ever provided by the company. They agree to pay over the odds to store a number of boxes. Then there is a bank deposit simply labelled “John”. There is no indication of how the payment was made; it could simply have been a cash payment over the counter in the bank. Then we have the delivery by a lorry which hands over a CMR which is obviously nonsensical. Then someone else turns up to collect the goods and that person’s identity was never disclosed to Tideswell before he came.

In Mr Watkinson’s submission, this amounts at the very least to a deliberate failure to enquire. Any reasonable business would look at all these factors and ask what on earth was going on. There are inconsistencies in JT’s account of events. He said that he had not been arrested, but he had been. In his interview he said that he looked at the documents closely, but now he says that he just checked how many pallets there were. Again, in his interview he said that the CMR referred to “office furniture”, which it clearly does not. He said he was not interested in what people were storing, but all the agreements he uses for his tenants say something about use. He went around the houses on whether Tideswell operates a storage or rental business. In an email to SP he said that the “company just operates on – site storage and rental units”. Now he has changed his tune to say that the company’s business is a rental one. There has been inconsistency about whether someone came with John to the first meeting.

Then we have significant differences between how Tideswell deal with their tenants normally and what they did here. JT loaded and unloaded goods for a client who never came to meet the lorry. He was very involved in looking after the goods, their custodian far more than a landlord. There is no formal document governing the relationship. Finally, we have the email JT sent to Peter after he had been released from the police station. McGrath Office Supplies were not provided with access to the site and JT kept the keys and had to make himself available for deliveries and collections.

In response to all of this, Ms Choudhury says that Tideswell was only being paid a relatively small amount of money (£600 per month) for the Unit and the risk it was running (potentially losing its business if it did something seriously wrong, such as storing large amounts of illicit cigarettes) was out of all proportion to the potential reward. Why on earth would someone in JT’s position, and especially at his age, do this? As far as the informality of the arrangements are concerned, she simply says that JT never bothered to ask John his surname, because he had no need to. He made an offer to John on a “take it or leave it” basis and no doubt John would be in touch if he wanted to take it up. It is, she submits, easy to build up a picture in hindsight, but as far as JT was concerned, he was simply developing a relatively low-level relationship with a new customer, who wanted some modest facilities and, it was hoped, would end up taking a longer lease, which would be appropriately documented.

If JT did have knowledge of what was proposed, then he went about facilitating the crooks in a rather odd way, using his own unit, helping to load and unload goods, going to the police station with the HMRC officers, answering all of their questions and not insisting on legal representation. Someone who was knowingly involved with illicit cigarettes would have realised the risk they were running and taken steps to try to limit that exposure.

As far as the email following his release from the police station is concerned, it was clear that JT had not realised he had been arrested or the danger he was in. Until this hearing he was convinced that he had gone to the police station voluntarily. There was no suggestion at any point during his interview that, although the illicit cigarettes had been seized, there was an additional duty liability which might fall on Tideswell. That only became apparent in the correspondence with SP which started several months later. There was no particular reason for JT to be alarmed; as he told the HMRC officers, this was the first he had heard about illicit cigarettes, and he was sure he had done nothing wrong.

JT gave evidence before us and the impression we formed of him is of a straightforward, albeit unsophisticated and naïve individual. We found it difficult to conceive of him storing these cigarettes knowing that they were subject to excise duty which had not been paid. We agree with Ms Choudhury that there is simply no evidence to suggest that this is the case. Whilst his arrangements with McGrath Office Supplies might be relatively informal, he had an explanation for that. He thought he knew who he was dealing with and that the necessary details about the business would be forthcoming in due course. The level of risk he was running (if he did know what he was letting himself in for) is out of all proportion to the reward he was receiving. Mr Watkinson did not suggest that Tideswell was receiving further rewards from the crooks beyond the £600 a month rental fee and we simply do not accept that someone in JT’s position would consciously allow Tideswell to run the risk of storing illicit goods for such a low return.

So far as “Nelsonian blindness” is concerned, again JT’s explanation (that it never occurred to him that there was anything here that needed investigation and which he deliberately closed his mind to) is consistent with the impression we formed of him. There was nothing unusual about not having a formal lease (particularly in a situation such as this where the unit was being shared with Tideswell), nor with a tenant paying for more space than they absolutely need. The bank statement simply refers to a “credit” and does not say whether the payment was a transfer or an over-the-counter cash deposit. There is nothing remarkable in a bank transfer which reflects an email which had announced it. Although JT was previously in the haulage business, Tideswell’s business does not require CMRs. He has some familiarity with them, but we accept that he simply looked to see whether the consignment was of the 12 pallets he was expecting. It is unreasonable to expect JT to have scrutinised the CMR and formed the view on its plausibility which SP and Mr Watkinson have done at some leisure after the event. He would have given McGrath a key to access the site if they had asked for it and loading and unloading was something he did for other tenants.

In short, Ms Choudhury submits, there is nothing in the relationship between Tideswell and the crooks which on its face would suggest that there was a high risk of Tideswell being asked to store illicit goods. With the benefit of hindsight one can see that some of these features might have elicited a vague sense of unease, but there are no specific facts which would firmly ground a suspicion. JT/Tideswell were simply entering into a relatively informal, low-key relationship in the hope that it would lead to something more substantial.

We agree with Ms Choudhury that, whilst there may be features of the relationship between Tideswell and the crooks which with the benefit of hindsight might create a sense of unease, none of the factors to which Mr Watkinson has pointed of themselves suggest either that JT knew what he was doing or which so obviously pointed towards what was going on that he must have at the very least turned a deliberate blind eye to the risk. When we add that to our perception of JT from seeing him give evidence, that he is a straightforward, albeit relatively naïve, unsophisticated and quite elderly individual, we accept JT’s evidence that it simply never occurred to him what was going on. We accept that it never occurred to JT that his relationship with McGrath Office Supplies was anything other than a relatively informal, early-stage business arrangement. Tideswell had not been “in trouble with the authorities” before. Not appreciating that risk, as opposed to knowing about it or appreciating the risk and deliberately ignoring it, is not sufficient to amount to “deliberate” behaviour for this purpose.

If Tideswell’s behaviour was not deliberate, HMRC could still impose a penalty, albeit of a lower amount, 30% of PLR. That is subject to the same reductions for disclosure, subject to a minimum penalty of 10% of PLR, on the basis that HMRC become aware of the failure less than 12 months after the time when the tax first became unpaid by reason of the failure (which we take to be a reference to when Tideswell first held the illicit cigarettes – 21 March 2019). Applying the same reduction here would give a penalty of 12% of PLR.

On the Penalty Appeal, we can substitute for HMRC’s decision another decision HMRC had power to make; see paragraphs 17 and 19 of Schedule 41. Accordingly, we propose to discharge the penalties based on deliberate behaviour and substitute penalties under paragraph 6(2)(c) with the same level of reduction as previously applied by HMRC. We have calculated the penalties as being 12% of PLR. If either party considers our calculation to be wrong, we will reconsider it.

Ms Choudhury did not suggest that there were special circumstances that would justify a further reduction under paragraph 14 and we cannot see any such circumstances for ourselves. Whilst we have found that JT’s actions were not deliberate, Ms Choudhury herself accepted that, at least with the benefit of hindsight, there were factors that might create a sense of unease and in his evidence to us JT said that he was now more interested in what his tenants stored than he had been in the past. Whilst not deliberate, we consider that JT was (objectively) careless in his behaviour and accordingly some penalty is appropriate.

For the reasons set out above:

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.