E1009

EXCISE DUTY – MOVEMENT GUARANTEE – Appellant wine and beer wholesaler – refused approval not fit to give guarantee – Appellant failed to comply with VAT and money laundering requirements – endemic weaknesses in financial and reporting systems – Appellant’s submissions related to improvements made since decision taken to refuse guarantee – Tribunal’s jurisdiction limited to considering facts existing at the time of disputed decision – was the Respondents’  decision to refuse approval reasonable – yes – Appeal dismissed – Order for Respondents’ costs

LONDON TRIBUNAL CENTRE

CLASSIC WINE CASH AND CARRY LIMITED  	Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMS	Respondents

Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
SHAHWAR SADEQUE 	 (Member)

Sitting in public in London on 11 December 2006

Qamar Siddiqui of Kala Associates, Accountants for the Appellant

Mario Angiolini, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
The Appeal
1.	The Appellant was appealing against the Respondents’ decision on review dated 13 January 2006 withholding approval of a movement guarantee to be provided by the Appellant. 
2.	The Appellant operated as a wholesaler of beers and wines, generally purchasing alcohol from a supplier in the United Kingdom and selling the alcohol to a French wholesaler. The Appellant contracted haulers to transport the alcohol between the suppliers. The Appellant operated from a single office within the offices of Kala Associates, a firm of accountants, and employed four members of staff. The Respondents had approved the Appellant as an owner of goods stored in a bonded warehouse (WOWGR authorisation).
3.	The Appellant required the Respondents’ approval for a movement guarantee in order to transport excise goods (beer and wine) held in duty suspension between two bonded warehouses. The Respondents withheld approval because they considered the Appellant   not to be a fit and proper person. 
4.	The issue for the Tribunal was whether the Respondents had acted reasonably in withholding approval of the movement guarantee. Thus we have to decide whether the Respondents acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether they had taken into account some irrelevant matter, or disregarded something to which they should have given weight when withholding approval of the movement guarantee. In exercising our jurisdiction we must limit ourselves to considering facts and matters, which existed at the time the challenged decision refusing the movement guarantee was taken.
The Law
5.	Directive 92/12/EEC (“the Directive”) lays down rules concerning excise duties on certain products, including alcoholic drinks. Essentially excise duty becomes chargeable on alcoholic drinks at the time of release for consumption. No excise duty is chargeable when the alcoholic drinks have been placed under a suspension arrangement which is defined in Article 4(c) of “the Directive” as:
 “a tax arrangement applied to the production, processing, holding and movement of products, excise duty being suspended”. 
6.	Article 15 regulates the movement of goods under suspension arrangements and provides, so far as is relevant, as follows:
“1. Without prejudice to the provisions of Articles 5 (2), 16 and 19 (4), the movement of products subject to excise duty under suspension arrangements must take place between tax warehouses. 
3. The risks inherent in intra-Community movement shall be covered by the guarantee provided by the authorized warehouse-keeper of dispatch, as provided for in Article 13, or if need be, by a guarantee jointly and severally binding both the consignor and the transporter. The competent authorities in the Member States may permit the transporter or the owner of the products to provide a guarantee in place of that provided by the authorised warehouse-keeper of dispatch. If appropriate, Member States may require the consignee to provide a guarantee. 
The detailed rules for the guarantee shall be laid down by the Member States. The guarantee must be valid throughout the Community”. 
7.	Thus under Article 15 a transporter of excise goods under suspension arrangements is required to place a guarantee with the competent authority for the Member State concerned, which in this Appeal would be HM Revenue and Customs.  The Member State is given the discretion to determine the detailed rules for the guarantee.  
8.	 Section 157 of the Customs and Excise Management Act 1979 restates the Respondents’ power to require a guarantee and that it is at their discretion whether they accept the guarantee. Section 157  provides:
“(1) Without prejudice to any express requirement as to security contained in the customs and excise Acts, the Commissioners may, if they see fit, require any person to give security (or further security) by bond, guarantee or otherwise for the observance of any condition in connection with customs or excise. 
(2) Any bond, guarantee or other security taken for the purposes of any assigned matter –
(d) may be cancelled at any time by or by order of the Commissioners”. 

9.	The Excise Goods (Holding, Movement, Warehousing and REDS) Regulations 1992 (the REDS regulations) specify the arrangements for the holding and movement of excise goods. 
10.	Regulation 10 lays down movement conditions and provides, so far as is relevant, as follows:
“(1)     Save as the Commissioners may otherwise allow or require and except for movements between excise warehouses which the Commissioners may specify in a notice, a consignment of excise goods may not be moved under duty suspension arrangements unless— 
(a)     the duty chargeable on the excise goods, and any charge described in paragraph (4) below, is secured as provided for in that paragraph […].
(4)     The duty mentioned in subparagraph (a) of paragraph (1) above shall be secured by an approved guarantee or bond; and any charge of a similar nature to duty that may arise in another member State in respect of those excise goods, when consigned to any of the other member States, shall also be secured by such a guarantee or bond”.
11.	As a matter of Community law Member States have a discretion to set rules or conditions for guarantees which are designed to ensure compliance with the suspension regime and prevent loss to the revenue. That discretion is implemented in the REDS regulations and section 157 of the Customs and Excise Management Act 1979.
12.	Regulation 10 of the REDS regulations confers a discretion on the Respondents to decide whether to approve a guarantee from an individual trader. The power to approve is implicit in section 157 of Customs and Excise Management Act 1979, because the explicit power under section 157(4) to cancel the security must include a power to withhold approval of a guarantee offered by a transporter.
13.	 Thus the Respondents have a discretionary power given by Community law and by the national implementing measures to withhold approval of the movement guarantee offered by the Appellant.
14.	The Respondents have translated their discretion into policy and procedural guidelines which are set out in paragraph 4.3 of X99 (Financial Securities Assurance) which states that
“If a trader applies for a movement guarantee and you think they are unsuitable on the grounds of possible impropriety or fraud, you need to send a report to the FSC via your Regional Risk Team or National Business Manager (NBM). Your report should include evidence to back up your claim and should also include recommendations.
The risk team or NBM will forward on your report and recommendations to the FSC for consideration on whether they are reasonable ie would the reasons stand up at Appeal.
If your recommendations are accepted, the FSC will issue a rejection letter to the principal, disclosing the evidence/reasons for rejection”.
15.	The Respondents in exercising their discretion consider first the suitability of the applicant to transport excise goods subject to suspension arrangements, and if deemed suitable they then decide the appropriate amount for the guarantee. 
The Evidence
16.	The Tribunal heard evidence from Adam Hanrahan, the officer who carried out the initial investigation of the Appellant’s suitability, and Brian McCann, the review officer. The Appellant did not call evidence but instead relied on the submissions made by its Representative.  Each party produced a bundle of documents.
The Review Decision
17.	 Mr McCann in his evidence identified three principal  reasons for withholding approval of the Appellant’s application for a movement guarantee: 
(1)	The consistent late submission of VAT returns and poor attitude to compliance in respect of the same;
(2)	The failure to register under the Money Laundering Regulations, despite repeated warnings, both orally and in writing, by the Commissioners;
(3)	The Respondents had concerns with the Appellant’s financial and company information, which caused them to question the overall credibility of the business.
18.	  The Appellant had not submitted its quarterly VAT returns on time from February 2002 to November 2005.  The Appellant’s explanation for the delay in submitting the returns was that its director, Mr Ahmed, had other important business to deal with and that he gets caught up with other work.
19.	The Appellant was a high value dealer and required to register as such by 1 April 2004 under the Money Laundering Regulations. Despite receiving repeated warnings from the Respondents, the Appellant failed to register by the due date, with the result that it incurred a penalty of £5,000, which was upheld on review.
20.	Further the Appellant carried on a relevant business within the meaning of the Money Laundering Regulations. The Appellant was, therefore, under an obligation to put in place procedures for evidencing the identity of trading partners where cash payments exceeding 15,000 euros were made. Mr Ahmed informed Mr Hanrahan that he did not obtain the required proof of identification from trading partners. 
21.	The Respondents’ concerns about the Appellant’s financial and company information, stemmed from the report prepared by Mr Skelly employed as an operational accountant by the Respondents. Mr Skelly identified the following flaws:
(1)	Discrepancies in the Appellant’s returns to Companies House regarding identities of shareholders and the value of share capital.
(2)	No transparent audit trails for transactions giving scope for the business to be used for laundering money. In particular, the Appellant conducted its business in cash and did not issue receipts for monies received.  No reconciliation between invoice amounts and bankings for the period 1 September 2004 to 8 February 2005. Mr Ahmed, the Appellant’s director, held interests in an off-licence business run by his wife.
(3)	Inaccuracies in the Appellant’s financial statements, for example the figures for cash flow and stock in the 2005 accounts.
(4)	No adequate business plan and cash flow forecast.
22.	Mr McCann concluded that the Appellant’s poor record of compliance with VAT and money laundering regimes combined with its inadequate  business planning and organisation demonstrated that the Appellant was not a fit person to be approved for the purpose of a movement guarantee.
23.	Mr McCann’s written review decision of 13 January 2006 made no reference to Mr Skelly’s report and the Respondents’ concerns about the Appellant’s financial and company information. The reasons given in the review letter comprised the Appellant’s poor compliance with VAT and money laundering regimes, and an allegation of unlawful importation of a beer consignment seized on 23 and 24 August 2005.  Mr McCann accepted that the allegation of unlawful importation should not have been included in his review letter. The Respondents had carried out a separate review of the importation, finding that there was no evidence that the Appellant was involved in the attempted evasion of excise duty. Mr McCann could give no explanation for not including in his letter the Respondents’ concerns with the Appellant’s financial and company information.
24.	Mr McCann did not consider that the Appellant’s WOWGR authorisation was relevant to the Appellant’s suitability to give a movement guarantee. In his view it was a necessary prerequisite for the guarantee.  The fact that the Respondents considered the Appellant suitable for the WOWGR authorisation but unsuitable for the movement guarantee was not a matter that Mr McCann examined in his review. 
The Appellant’s submissions
25.	Mr Siddiqui made the following submissions on behalf of the Appellant:
(1)	The Appellant submitted its last four VAT returns on time. The delays in respect of the previous returns were not entirely the Appellant’s responsibility because the Respondents retained some of the Appellant’s records to verify its claims for input tax. The Respondents suffered no loss from the delays because all the returns were repayment ones.
(2)	The Appellant agreed that it had been fined for not registering as a high value dealer. One of the reasons for this was that the director had a poor comprehension of written English. Mr Siddiqui, however, accepted that the Respondents warned the Appellant on several occasions about the need to register before imposing the penalty.
(3)	 The Appellant challenged the finding that it had not complied with the record requirements for Companies’ House. The error regarding the directors’ identity was a transcription mistake made by Companies House. The Appellant posted the shareholding details but unfortunately it had got lost in the post.
(4)	The Appellant considered the majority of the Respondents’ concerns about the accuracy and transparency of the Appellant’s financial accounts was without foundation. Mr Siddiqui provided an example of an audit trail for one transaction. However, Mr Siddiqui accepted that the Appellant had not introduced a system of receipts at the time of Mr McCann’s review.  Mr Siddiqui’s explanations for the discrepancy with the reconciliation between the accounts and bank statements were uncashed cheques and loans, which contradicted Mr Ahmed’s statement to Mr Skelley about the non-existence of loans.
(5)	Mr Siddiqui challenged Mr Skelley’s conclusion about the ineffectiveness of the business plan. According to Mr Siddiqui, business plans were nothing more than an estimate of future trends. He produced  copies of the 2005 and 2006 Financial Statements to demonstrate that the Appellant was a liquid, viable and stable company. Mr Siddiqui, however, was unable to comment upon whether the Appellant examined the costs of its proposed business expansion against the prospective income from the venture.
(6)	Mr Siddiqui considered that Mr Ahmed was entitled to hold interests in other businesses. He pointed out that Mr Ahmed lived in a free economy and had the right to conduct his business affairs as he saw fit. The Respondents provided no evidence of wrong doing in respect of the off-licence run by Mr Ahmed’s wife. Mr Siddiqui described the suggestion that Mr Ahmed might use his wife’s business to divert stock subject to the duty suspension regime as a baseless and false allegation. Mr Siddiqui, however, did not explain why Mr Ahmed told Mr Skelly that he had no other business interests. Also Mr Ahmed failed to disclose to Mr Skelly his position of company secretary in his wife’s company.
(7)	Mr Siddiqui stated that the Appellant had carried out appropriate checks on its customers. Mr Siddiqui produced a copy of one customers’ passport and a report from the French Chamber of Commerce to substantiate his statement on behalf of the Appellant. The Tribunal was unable to assess the relevance of the report because it was written in French. The passport related to a Mr Chiu, who we assumed to be the Chinese gentleman met by Mr Ahmed at the Matrix warehouse in Calais. Mr Ahmed, however, was unable  to name Mr Chiu when interviewed by Mr Skelly, 
26.	 Mr Siddiqui considered that the Respondents’ withholding of the movement guarantee approval denied the Appellant’s right to expand its business. The Appellant was prepared to give a guarantee in the form of a bond in the sum of £80,000.
27.	The Appellant’s turnover grew from £2M in 2005 to over £5M in 2006.
Reasons for Our Decision
28.	The analysis of the legal provisions set out in paragraphs 5 to 15 demonstrates that the Respondents have a discretionary power given by Community law and by the national implementing measures to withhold approval of the movement guarantee offered by the Appellant.
29.	 The Respondents’ withholding of a money guarantee approval falls within the definition of an ancillary matter within the meaning of paragraph 2(1)(s) of Schedule 5 of the Finance Act 1994. As such the Tribunal’s jurisdiction on appeal is limited to examining whether the Respondents’ refusal to approve the Appellant’s application for a movement guarantee was reasonable.
30.	Section 16 of the Finance Act  1994 sets out the Tribunal’s appellate jurisdiction:
“(4)     In relation to any decision as to an ancillary matter, or any decision on the review of such a decision, the powers of an appeal tribunal on an appeal under this section shall be confined to a power, where the tribunal are satisfied that the Commissioners or other person making that decision could not reasonably have arrived at it, to do one or more of the following, that is to say— 
(a)     to direct that the decision, so far as it remains in force, is to cease to have effect from such time as the tribunal may direct;
(b)     to require the Commissioners to conduct, in accordance with the directions of the tribunal, a further review of the original decision; and
(c)     in the case of a decision which has already been acted on or taken effect and cannot be remedied by a further review, to declare the decision to have been unreasonable and to give directions to the Commissioners as to the steps to be taken for securing that repetitions of the unreasonableness do not occur when comparable circumstances arise in future”.
31.	  Respondents’ counsel submitted that the Tribunal in exercising its jurisdiction under section 16(4) of the Finance Act 1994 is restricted to considering facts and matters which were in existence at the date of the disputed decision and known to the Commissioners when the disputed decision was taken (Customs and Excise Commissioners v Peachtree, [1994] STC 947. Counsel, however, drew our attention to the Tribunal decision in Chips Logistics [2005] VAT & Duties Decision E914 which  at paragraph  5  appeared to offer a contrary view:
“It is now well established by authority from the higher courts that the Tribunal can make findings of fact and is not limited, when viewing the reasonableness of the decision either to the facts as known to the decision maker or as perceived by him or her and that its reasonableness is to be judged in the light of the facts as we find them to be”.
32.	Counsel submitted that the opinion expressed at paragraph 5 in Chips Logistics was legally wrong and must have been per incuriam as it failed to cite Peachtree and any other judgment in support, despite referring to established authority from the higher courts. 
33.	We consider that the Tribunal decision in Chips Logistics was not in conflict with Peachtree. The latter involved an Appeal against a VAT & Duties Tribunal decision dealing with an imposition of a security under the VAT Act. Essentially the High Court decided that the Tribunal erred in taking account of events that occurred after the imposition of the security, Dyson J at 752 stated that
“In my judgment, in exercising its supervisory jurisdiction the tribunal must limit itself to considering facts and matters which existed at the time the challenged decision of the commissioners was taken. Facts and matters which arise after that time cannot in law vitiate an exercise of discretion which was reasonable and lawful at the time it was effected”.
34.	The Tribunal in Chip Logistics did not opine that it was entitled to consider events happening after the date of the disputed decision. In our view, the Tribunal was stating the obvious that its decision on reasonableness depended upon its findings of  facts, to which we would add, at the time the disputed decision was made.
35.	Thus when considering  the reasonableness of the Respondents’ decision on review to withhold approval of the movement guarantee from the Appellant we are restricted to the facts and matters which existed at the time the review decision was taken.
36.	Mr McCann in his evidence gave three principal reasons for refusing approval of the Appellant’s movement guarantee. They were the Appellant’s failures to comply with VAT requirements and money laundering regulations and the weaknesses in the Appellant’s financial and business systems identified by Mr Skelly. Mr McCann’s reasons, however, were not fully reflected in his written review decision of 13 January 2006. His written decision omitted reference to Mr Skelly’s report. Further the alleged unlawful importation of a beer consignment seized on 23 and 24 August 2005 was cited as one of the reasons for withholding approval of the movement guarantee. Mr McCann was apologetic about the deficiencies in his written decision. 
37.	Having heard from Mr McCann we are satisfied that he made the disputed decision on the facts as presented in his evidence rather than those described in the written decision. The Appellant was not prejudiced in the conduct of its Appeal by the inadequate written decision because Mr McCann’s witness statement, which set out the evidence he proposed to give at the Tribunal, was served upon the Appellant in September 2006.
38.	The Appellant adduced no evidence at the hearing to challenge the facts underlying Mr McCann’s decision. Instead the Appellant relied upon Mr Siddiqui’s representations to make out its case about the unreasonableness of the Respondents’ position.
39.	 The facts regarding the Appellant’s failures to comply with VAT requirements and the money laundering regulations spoke for themselves. Mr Siddiqui did not challenge the existence of those facts but offered explanations for the Appellant’s conduct. We attach no weight to the explanations given. They were not supported by direct evidence from Mr Ahmed, the director of the Appellant company.  The explanation that the VAT returns were repayment ones did not justify their late delivery to the Respondents. Further, Mr Ahmed had been warned on several occasions about the need for the Appellant to register as a high value dealer. The warnings undermined Mr Siddiqui’s explanation of Mr Ahmed’s inadequate grasp of written English for the Appellant’s failure to comply with money laundering regulations.
40.	We find that Mr Siddique’s submissions on Mr Skelly’s report did not shed new light  on the inherent weaknesses in the Appellant’s financial and reporting systems as revealed by the report. Mr Siddique accepted that the Appellant was a cash trader which only introduced receipts for cash received after the visit by Mr Hanrahan and Mr Skelly. Mr Siddiqui appeared to agree with Mr Skelly that the Appellant’s business was funded by loans, which was denied by Mr Ahmed.  The documentary evidence produced by Mr Siddiqui regarding checks on the Appellant’s customers was unconvincing. Mr Siddiqui offered no adequate explanation for Mr Ahmed’s reticence about his involvement with his wife’s off licence business.
41.	Mr Siddiqui placed great store on the improvements made by the Appellant in its business systems and VAT compliance subsequent to Mr McCann’s decision. However, we are not concerned with those improvements because our decision on the Appeal must be based on those facts that were in existence at the time the disputed decision was taken.
42.	 The Respondents’ powers to regulate approval of movement guarantees are targeted at mitigating the risks associated with the suspension regime and prevent loss to the revenue. The Respondents have applied their powers so as to ensure that only fit and proper persons are approved for movement guarantees. We are satisfied that the weight placed by Mr McCann upon the Appellant’s failures to comply with VAT requirements and money laundering regulations were relevant facts to take into account when deciding whether the Appellant should be approved for the guarantee. The Appellant’s failures showed a disregard for regulatory requirements which are a particular feature of the suspension regime.
43.	We find that Mr McCann was correct to have regard in his decision to the weaknesses in the Appellant’s financial and control systems. The identified weaknesses demonstrated that the Appellant posed a tangible risk to protection of the revenue.  The weaknesses gave scope for the business to be used for money laundering, and the opportunity to divert stock destined for export to the home market, particularly if the proposed expansion of the Appellant’s business did not yield the anticipated profits. 
44.	We consider that Mr McCann should have examined more closely the relevance of the existing WOWGR authorisation for the Appellant. We were informed that the WOWGR authorisation followed a similar procedure to the movement guarantee approval. Mr McCann considered that it was unnecessary to address the issue of the WOWGR authorisation, other than to satisfy himself that it had been granted because it was a legal pre-requisite for the movement guarantee. On the face of it, the Respondents were open to an allegation of acting inconsistently, which might have had a bearing upon the Appellant’s application for a movement guarantee.  We are satisfied, however, that if Mr McCann had concluded that the Respondents were acting inconsistently, it would not have altered the outcome of his review decision because of the serious risks posed by the facts identified in paragraphs 42 and 43 above. We also note that both Mr Skelly and Mr Hanrahan recommended the revocation of the Appellant’s WOWGR authorisation, which adds support to our view that the review decision would have been the same. 
45.	 Apart from the issue of the WOWGR authorisation, we find no evidence that Mr McCann took into account some irrelevant matter or disregarded something to which he should have given weight in coming to his decision on the 13 January 2006.
46.	We find that Mr McCann acted in a way that a reasonable panel of commissioners would have acted. He took account of relevant matters in arriving at his decision and disregarded irrelevant matters. Mr McCann should have considered more closely the relevance of  the WOWGR authorisation for the Appellant, however, we are satisfied that even if the Respondents had acted inconsistently, a reasonable panel of commissioners would have arrived at the same decision as Mr McCann: to refuse approval of the movement guarantee.
Decision
47.	We hold for the reasons advanced in paragraphs 36 to 46 that Mr McCann’s decision was reasonable within the meaning of section 16(4) of the Finance Act 1994. We, therefore, dismiss the Appeal.
Application for Costs
48.	On 7 December 2006 the Appellant served a bundle of new documents upon the Respondents which purported to respond to the points raised by the reports of Mr Hanrahan and Mr Skelly, which were disclosed to the Appellant in the Respondents list of documents dated 19 June 2006. The Appellant gave no explanation for the late delivery of its bundle. 
49.	The Respondents formed the view that much of the new information related to alleged improved conduct by the Appellant after Mr McCann’s decision had been made. In those circumstances the Respondents contacted the Appellant’s representative and explained that such information would only be relevant to a renewed application for a movement guarantee. The Respondents, therefore, invited the Appellant to agree to an adjournment of the hearing so that a renewed application, based on this updated information, could be made and properly considered by the Respondents. The Appellant refused to take up the Respondents’ invitation, insisting that the hearing should go ahead. 
50.	The Respondents applied for their costs in the event of the Appeal being dismissed on the grounds of the Appellant’s unreasonable conduct, namely:
(1)	The late submission of the bundle of new documents. 
(2)	 The rejection of the Respondents’ offer to reconsider their decision on the movement guarantee based on the new information provided by the Appellant.
(3)	The refusal to agree to an adjournment which generated otherwise avoidable costs for the Respondents. 
51.	The Appellant’s representative considered that it was reasonable to refuse the Respondents’ offer of an adjournment. Mr Siddiqui stated that the case had been adjourned seven times and that the Appellant felt that it was simply a delaying tactic on the part of the Respondents.
52.	The Tribunal file revealed that there had been no previous listings for the substantive appeal. We, therefore, find no basis for the Appellant’s suggestion of  delaying tactics on the part of the Respondents. 
53.	We are satisfied that the Respondents had made out their case for costs. We, therefore, order the Appellants to pay the Respondents their reasonable costs for the hearing. In the event of no agreement between the parties about the reasonable costs, we give permission for either party to apply for the Tribunal to determine the costs. 
54.	The Tribunal reminds the Appellant that the Respondents have confirmed that any new material and evidence of improved compliance would be taken into account if a renewed application for a movement guarantee is submitted on the Appellant’s behalf. The Respondents cannot, give any views as to the likely outcome of such a renewed application as much will depend on consideration of all the relevant factors, as they transpire at the time the application is made, and investigations of the Appellant’s current compliance and record-keeping.

                                                    

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 3 January 2006

LON/06/8017