Petmaster Limited v The Commissioners for HMRC

The Appellant is Petmaster Limited (‘Petmaster’). The Respondents are the Commissioners for His Majesty’s Revnue and Customs (‘HMRC’).

This is an appeal to the First-tier Tribunal (‘the Tribunal’) by Petmaster against HMRC’s refusal to restore 24 tonnes of cat litter. The cat litter was seized and forfeited by HMRC from an unapproved Fulfilment House (‘FH’). The original decision refused restoration. The review decision also arrived at the same conclusion (‘the restoration decision’). As a result, the cat litter was destroyed. Any restoration that might be made would have to be by way of compensation.

We were informed this was the first case to reach the Tribunal involving the third country Fulfilment House Due Diligence Scheme (‘FHDDS’). However, although that is the context for the appeal, no new point of principle arises calling for determination. The restoration decision will be considered by the Tribunal upon traditional and established principles.

Before the hearing we received a 222-page bundle containing some of the relevant documentation. Shortly before the hearing we received a supplementary bundle containing 52 pages. We had witness statements or equivalent documents from three witnesses. There were also skeleton arguments on both sides. The Appellant’s appended some further documents to theirs.

The hearing lasted a full day. At the invitation of the Tribunal, HMRC went first. The Respondents opened and called Officer Edwards, who had made the original decision refusing restoration. We then heard from Mr Oguz, the director of the Appellant. The Appellant then called the owner of the FH.

We wish to record and express our gratitude to the interpreter who appeared to assist Mr Oguz. It was only due to her skill that the evidence was able to conclude in a single day by 4.30pm. We therefore directed written closing submissions and were grateful to receive them from HMRC drafted by Ms Brown, and from the Appellant thereafter.

At that point we also received from the Appellant a further statement from the owner of the FH who he called to give evidence and who had already been cross examined, together with a number of further exhibits. We did not request HMRC to make submissions on whether we should consider that evidence. Due to the lateness and obvious prejudice to HMRC by reference to their late creation and the witness having already given evidence, we declined to admit them under Rule 15 (2) (b) (iii) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (‘the Rules’).

We thank both advocates for HMRC and Mr Oguz for the way they presented their respective cases orally and in writing.

The third country FHDDS is described by His Majesty’s Government in the following way:

Its effect was intended to be upon businesses located outside the European Union and it came into effect on 1 April 2018.

The law was not in any dispute, so we set it out here to give the framework to our findings of fact which follow.

The third country FHDDS was brought into force on 1 April 2018 by the Finance Act (No.2) 2017 (‘FA no.2’). Section 48 is headed Carrying on a third country goods fulfilment business and states:

Section 49 is headed Requirement for approval and states (in material part):

Such approval is governed by the Fulfilment Businesses Regulations 2018. Those state (in material part):

In this case Petmaster accepts that the FH (a) carried on a third country fulfilment business and (b) did not have the relevant approval from HMRC.

Whether a person who is not established in a member state is a question of fact. In De Beers Consolidated Mines Ltd v Howe [1906] AC 455, Lord Loreburn stated:

In this case Petmaster now accepts (although did not at the time it was communicating with HMRC) that it was not based in a member state and was based in Turkey where the real business is carried on and central management and control abides so we say no more about it (although we were helpfully referred to The Council Implementing Regulation (EU) No 282/2011 but in light of Petmaster’s position any analysis of that can await a decision in which it is required).

The effect of Petmaster being established in Turkey is that it is not required to register for VAT here unless the conditions in the Value Added Tax Act 1994 (‘VATA’) in Schedule 1A are met. That is headed Liability to be registered and states (in material part):

In this case Petmaster accepts that it should have been registered for VAT here but was not. Petmaster accepts that the usual threshold for turnover which would apply to a company based here did not apply to it.

It was therefore a ‘non established taxable person’ (‘NETP’).

Section 54 is headed Forfeiture and states:

The reference to CEMA 1979 is to the Customs and Excise Management Act 1979 (‘CEMA’).

In this case Petmaster accept that section 54 applies as a person was carrying on a FH in a way governed by sub-sections (1) and (2) above.

Section 139 CEMA is set out in Chapter 2, Part XI headed DETENTION OF PERSONS, FORFEITURE AND LEGAL PROCEEDINGS. Under the direct heading Forfeiture section 139 is headed and states (in material part):

As a result of amendments to CEMA by the Finance Act 2013 schedule 2A was inserted. That states (in material part):

Thereafter, the owner has a calendar month to challenge the legality of the seizure by issuing a notice of claim to HMRC. If that is done, then HMRC will apply to the Magistrates’ Court for condemnation and a person will receive a summons. However, in this case that was not done and as a result the seizure is deemed lawful.

Section 152 CEMA is also in the same part. It is under the overall heading General provisions as to legal proceedings and states and is headed (in material part):

The Finance Act 1994 (‘the 1994 Act’) contains several provisions in relation to appeals to the Tribunal. Appeals against adverse restoration decisions are ‘ancillary’ decisions for the purposes of the 1994 Act. That means the Tribunal has a supervisory, as opposed to a “full-merits”, jurisdiction. Therefore, our task is to consider whether the restoration decision is one which could not reasonably have been arrived at.

Section 16 (4) of the 1994 Act states:

In our judgment we are entitled to and can only sensibly have regard to the original decision and the review when considering the decision of HMRC through its officers. It is not suggested otherwise by HMRC who urge both decisions upon us as being reasonable.

HMRC are entitled to have, and apply, a policy in which compelling reasons are needed before restoration is made. That policy includes consideration of proportionality. Therefore, a decision will not be unreasonable simply because HMRC require compelling reasons before making restoration.

In Behzad Fuels Limited v HMRC [2017] 0321 (TCC) (‘Behzad’) the Upper Tribunal gave guidance on the approach of the Tribunal in such cases. At paragraphs 28 and 29 they said:

By section 16 (6) of the 1994 Act, it is for Petmaster to show the grounds upon which their appeal has been brought have been established, so that it is more likely than not.

We also remind ourselves that if, depending upon any findings of fact, and despite any errors the outcome would have been the same in those circumstances we should dismiss the appeal.

These are the principles we will apply to our findings of fact.

As we have said we heard from three witnesses. We accept that Officer Edwards was an honest witness who gave his evidence to us in a helpful way, making concessions as appropriate. We also find that Mr Oguz the director of Petmaster was an honest witness doing his best to assist the Tribunal unrepresented and with the assistance of an interpreter. In terms of the owner of the FH we are sceptical about some of his evidence, in particular what he had to say about his communications with HMRC over approval and his inability to research the FHDDS online. However, where his evidence was consistent with Mr Oguz’s we accept it.

We make the following findings of fact based upon the evidence we heard, and the documents supplied to us. These findings are those that are necessary for our decision.

In 2021 Mr Oguz wanted to trade between Turkey and the United Kingdom by importing, and then selling, cat litter. In July 2021 he asked accountants in the United Kingdom to register for VAT. He said:

In reply, the accountant wrongly told him, as he was not established in the UK:

We accept that this advice was given and this firm of accountants knew that Mr Oguz was at that point going to trade from Turkey to the UK.

Shortly thereafter on 16 September 2021 Petmaster Limited was incorporated at Companies House. The sole director is Mr Oguz and is the only employee. He resides in, and works from, Turkey. Although Petmaster has a registered address in London, that is no more than a postal address. As Mr Oguz accepted, the real business is carried on from Turkey. Given the advice he had regarding VAT in the United Kingdom, Petmaster was not registered for VAT at that stage.

Petmaster worked through a Turkish intermediary themselves based in Turkey. Petmaster changed accountants and in 2022 received the same incorrect advice regarding the VAT threshold in the UK as triggering the requirement to register. We accept that, although there was an English address, that the accountants (who have many Turkish clients) did not believe Petmaster would be UK based and gave erroneous advice. The basic business model demonstrates that Petmaster would be an NETP based in Turkey and working from there and that was the information that the intermediary and the accountants had.

Petmaster did not receive any advice from the accountants in relation to checking themselves the UK government’s register of FHs. Mr Oguz speaks almost no English at all and prior to this did not know about a register of FHs. The register was live on the gov.uk website and was accessible in Turkey.

Mr Oguz and his wife put their savings of over three years into the business of Petmaster and the importation buying the cat litter for £4,377.60 and paying for the associated costs. The non-return of the cat litter or compensation will have a significant impact upon Petmaster and Mr Oguz and his family. The purchase price of the cat litter represents a year’s annual income of Mr Oguz.

We do not accept that owner of the FH was told by HMRC that nothing was missing and having confirmation to trade as an FH nor that he was unable to find details of FHs online because of misspelling ‘fulfilment’. However, we do accept that Petmaster believed that the FH operated properly and that nothing the owner said in any of their communications suggested anything to the contrary. Mr Oguz was not told by the FH (where Turkish is spoken) that it did not have the relevant approval and was told all licences were in place. When he called the FH he was told to send his goods there and the FH would store them.

Had Petmaster been aware the FH was not approved by HMRC they would not have used them to store their goods.

On 20 June 2022 Petmaster imported 24 tonnes of cat litter from Turkey to the United Kingdom. The relevant import VAT and duties were paid at port. The cat litter was transported to the FH. That FH was not listed on the government’s list of registered FHs which is available online.

On 1 November 2022 Officer Edwards was asked to consider the FH and whether it was operating without approval. He concluded it may not have been and on 7 November 2022 conducted an unannounced visit to the FH to discuss its trading and the requirements of the FHDDS. During discussions with the owner, it became apparent that he did not have approval, and the FH was operating as such to require it. After considering the customer list and requesting import documentation, which the owner did not provide, most of the 55 owners were NETPs based in Turkey. Their goods were seized including Petmaster’s 24 tonnes of cat litter but stayed in situ due to their size. Notice 12A itself was not left with the owner of the FH (in the paperless society HMRC no longer do this but inform about the online existence) but did leave a notice headed ‘Warning of liability to prosecution’ as officers suspected a criminal offence may have been committed.

The owner did not communicate the online existence of Notice 12A to Petmaster and Petmaster first communication with HMRC was 32 days after the seizure which is outside the time limit.

No claim was issued to HMRC challenging the legality of the seizure. In the event notice 12A was issued to a person suspected of an offence that occasioned the detention of the goods.

Petmaster did not sue the FH as they could not afford the lawyers’ fees to do so.

On 5 January 2023 Petmaster claimed restoration of the cat litter. There were exchanges of correspondence and discussions with representatives for Petmaster. Some information, but not proof of ownership of the cat litter by reference to bank statements, was provided to Officer Edwards.

This included a screenshot of the transfer of money, and in an email, setting out his personal circumstances and that if he did not get the goods back, he could be in a major financial crisis.

On 13 February 2023 Officer Edwards refused to restore the cat litter. His decision related that he was refusing to do so because: (1) Petmaster had not provided bank statements to support the purchase and therefore ownership of the cat litter (2) the cat litter was sent to a non-registered FH (3) As an NETP Petmaster should have been registered for VAT and was not (and no application was found), to account for VAT on sales.

On 6 April 2023, after a request for an independent review, Officer Edwards’s decision was upheld. In that decision the reviewing officer found that Petmaster was the owner of the cat litter (disagreeing with Officer Edwards on the material before him). He said:

He went on to find:

He ended his review under the heading My conclusion:

The review officer was not called by HMRC to give evidence to the Tribunal. It was accepted by Officer Edwards that Petmaster had not failed to pay VAT owed on imports and that the review officer had made an error in so stating. Officer Edwards very properly accepted in evidence:

Thus, the reviewing officer had disagreed with Officer Edwards on his first reason about ownership. They agreed about the choice of using a non-approved FH. They agreed about the non-registration of Petmaster for VAT, but the reviewing officer then incorrectly stated that import VAT had not been paid, something he described as a ‘significant error’.

We remind ourselves of the test in the 1994 Act and the guidance of the Upper Tribunal in Behzad.

HMRC submit that:

Petmaster submit that they were honest actors who were misled by their accountants in relation to registering for VAT and by the FH in relation to its approved status (or lack thereof). They submit that the decision was unreasonable as mistakes were made by HMRC in the decisions.

We are in no doubt at all that the decisions cannot stand. They were unreasonable by reference to all the information before us in terms of how they were reached and on the primary findings of fact we have made exercising a degree of hindsight (Behzad paragraph 29).

We make that finding for the following reasons asking ourselves whether there were errors of law, whether all relevant considerations and have been taken into account and all irrelevant ones left out:

In our judgment, our findings show compelling reasons why the decisions must be set aside as unreasonable. We emphasise that we had the advantage of a hearing and material that was not available to the officers and no criticism attaches to Officer Edwards.

Thereafter, standing back, as we must, we cannot say on those findings that the restoration decision would inevitably have been the same so as to be able to dismiss the appeal in any event.

For those reasons the appeal is allowed. The effect of that is the Tribunal requires HMRC to remake the restoration decision.

In doing so we make the following directions:

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.