Customs and excise quarterly update - May 2024

Welcome to the May 2024 edition of RPC's Customs and Excise Quarterly Update.

News

1. HMRC has announced that all businesses are now able to use the Customs Declaration Service (CDS) for their export declarations. The CDS is intended to be an improvement on the older Customs Handling of Import and Export Freight (CHIEF) service which has been used since 2018 for import declarations. Currently, 70% of all export declarations are still submitted through CHIEF. Declarants will have until 4 June 2024 to move to the CDS, although they will continue to be able to view and amend declarations submitted via CHIEF after the transition period is over. HMRC has published guidance to assist exporters with the transition.

2. HMRC and the Treasury have launched a consultation, seeking views on "proposals for the design and administration of the UK carbon border adjustment mechanism (CBAM) from 1 January 2027." The CBAM is a carbon border tax designed to equalise the costs of carbon intensive goods entering the UK with the costs of equivalent domestic production. This should prevent imported goods having an advantage over domestic goods which are subject to UK carbon pricing.

We discussed the initial announcement in the February 2024 edition of our Customs and Excise Quarterly Update. The consultation, which invites all interested parties to submit their views by 13 June 2024, gives further detail on the proposed implementation of the CBAM. The CBAM will apply a charge on the emissions embodied in relevant imports into the UK of specified carbon-intensive commodities in the following sectors: aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel. The charge will arise either when a good first enters the UK (if not subject to customs controls) or is released into free circulation having been subject to customs. Under the draft proposals, any person who is responsible for £10,000 or more of CBAM goods passing a tax point in a rolling 12-month period must register for CBAM. CBAM will be charged on imports from 1 January 2027, but will not be payable until the end of the first accounting period on 31 December 2027 (and quarterly thereafter). Potentially affected businesses should consider the proposals and submit any responses to the consultation before the 13 June deadline.

3. HMRC has announced an important update to its Economic Operators Registration and Identification (EORI) number change or cancellation guide. If a business deregisters for VAT they will lose any EORI numbers they hold. EORI numbers are needed for various authorisations and licences. If a business that has deregistered for VAT – or is planning to do so in the future – needs to continue using an authorisation or licence, it must contact the supervising office of the authorisation or the issuing government department of the licence. Businesses can apply for a new GB EORI number and then, if they meet the relevant criteria, an XI EORI number.

Case reports

ThyssenKrupp Materials (UK) Ltd v Commissioners for HMRC [2024] UKUT 00079 (TCC)

The Upper Tribunal (UT), in allowing the taxpayer's appeal, has held that a single error on a bill of discharge does not give rise to a customs debt under article 204 of the Community Customs Code.

ThyssenKrupp Materials (UK) Ltd (TK) was authorised by HMRC to operate the inward processing procedure.  It claimed inward processing relief (IPR) under the suspension system in relation to components that it used to manufacture aircrafts.  As required under the inward processing regime, it submitted quarterly bills of discharge (BoDs) to HMRC in the form of spreadsheets, each containing 100,000 to 200,000 data points.

HMRC issued a C18 post clearance demand requiring payment by TK of nearly £8.9m, comprising £2.4m of customs duty and £6.48m of import VAT for the period March 2014 to December 2014.  HMRC considered that the relevant quarterly BoDs contained errors, and also some data was inconsistent with HMRC's management support system database.  TK maintained that while the BoDs did contain some errors, they were immaterial.  HMRC's position was that a single defect on a BoD meant that customs duty and import VAT liabilities arose in respect of all imports covered by that BoD.

TK appealed to the First-tier Tribunal (FTT), which dismissed its appeal, basing its conclusions on its interpretation of C-262/10 Döhler Neuenkirchen, in which the Court of Justice of the European Union held that the taxpayer's failure to submit a BoD on time gave rise to a customs debt for all entries on the BoD.  TK appealed to the UT.

The UT considered that the FTT had erred in its interpretation of Döhler.  There was, it considered, a significant difference between failing to submit a BoD at all within the required timeframe and submitting a BoD on time that contained a few errors which did not have a significant effect on the operation of the customs procedure in question.  Where there were errors which had a 'significant effect', a customs debt could be incurred with respect to those specific entries.

Why it matters:

This decision, in which the UT roundly rejected the approach adopted by the FTT, injects a welcome dose of common sense into the operation of the inward processing regime.  As it is a decision of the UT, it has precedent value.  

The decision can be viewed here.

Kent Couriers Ltd v HMRC [2024] UKFTT 00145 (TC)

Kent Couriers Ltd (Kent) is a courier, haulage and storage company which undertakes work independently and through a network (the Network) operated by a company named Palletways (UK) Ltd (Palletways). The services offered by Kent include both transportation and storage.

On 2 July 2020, a vehicle was stopped and inspected by UK Border Force and found to contain vodka instead of soft drinks.  On the pallet label, Kent was listed as the consignee.  The alcohol, which Kent had no knowledge of, was seized by the UK Border Force.

HMRC issued Kent with an excise duty assessment of £36,176 on the basis that Kent was the person making the delivery of the goods and/or the person holding the goods intended for delivery under Regulation 13 of the Excise Goods (Holding, Movement and Duty Point) Regulations 2010 (the 2010 Regulations) (the First Issue). HMRC also issued Kent with a penalty assessment of £16,460 which was later reduced to £10,852 under Paragraph 4, Schedule 41, Finance Act 2008 (Schedule 41) (the Second Issue). Kent appealed both the First Issue and the Second Issue to the FTT.

The FTT allowed Kent's appeal in relation to the First Issue, but dismissed its appeal against the Second Issue. However, the FTT substituted HMRC's decision on the amount of the penalty with a lower amount of £7,235.20.

On the First Issue, the FTT held that, applying Hartleb T/A Hartleb Transport v HMRC [2024] UKUT 34 (TCC) (Hartleb), Kent was not "holding" the alcohol or "making the delivery" of the goods at the excise duty point on the facts of the case. In this regard:

1. Although Kent had legal control of the goods at the excise duty point, its legal control was no more than "a mere shell" as Kent had been instructed to collect the goods as agent for its customer and, as such, held those rights and powers of legal control of the goods on trust for its customer.

2. It was clear that Kent did not have de facto control of the goods at the excise duty point. This was on the basis that, in effect, after Kent placed the order with the Network, Kent had no ability to control either the carriers involved or the route which the goods were going to take on their journey to the UK.

3. The entity which had de facto control of the goods in the course of the journey, and at the excise duty point, without physical possession of the goods, was Palletways as the controlling mind of the Network.

4. Applying the four factors identified in Dawson's (Wales) Ltd v HMRC [2023] EWCA Civ 332: (i) physical possession of the goods at the excise duty point was with the lorry driver who was transporting the goods when they were brought into the UK; (ii) Kent had legal control but did not have de facto control at the excise duty point; (iii) there is no difference in timing between the excise duty points which are relevant to the lorry driver, Kent and Palletways, because in each case the excise duty point was when the goods were brought into the UK; and (iv) there is no difference in the location of the goods at that excise duty point.

Accordingly, the "holder" of the goods at the excise duty point was either the lorry driver, who was the person in physical possession of the goods at that point, or Palletways, who was the person with de facto control of the goods at that point. The FTT did not consider it necessary to go further and determine which of these was the "holder" of the goods for the purposes of determining the appeal.

The above analysis also supported the view that Kent was not "making the delivery" of the goods at the excise duty point. In particular, the FTT concluded that at the excise duty point, the goods in question were being carried by a person who was unknown to Kent and whose route to the UK and time of entry into the UK were similarly unknown to Kent.

On the Second Issue, the FTT held that a penalty was appropriate. However, the quantum was reduced to take into account that Kent's act or failure was not deliberate, that it made a prompted disclosure and that once Kent realised that HMRC was conducting a genuine enquiry, it was as co-operative. The FTT commented that:

1. Paragraph 4, Schedule 41, was engaged because of the extensive scope of the provision. The relevant part states that a penalty is payable by a person where, after the excise duty point for any goods which are chargeable with excise duty, the person acquires possession of the goods or is concerned in carrying, removing, depositing, keeping or otherwise dealing with the goods.

2. Paragraph 19, Schedule 41, entitled it to cancel or affirm HMRC's decision to assess a wrongdoing penalty and, in terms of quantum, to affirm or substitute HMRC's decision.

3. The act or failure by Kent was not deliberate.

4. Although it was sympathetic to Kent's predicament, Kent did not have a reasonable excuse.  For example, Kent had not undertaken the necessary due diligence into the customer or his business.

5. Although the quantum of the penalty had not been explicitly appealed by Kent, the FTT could assess the quantum of the penalty under its case management powers and its obligation to deal with cases fairly and justly. Further, there would be no unfairness to HMRC in taking this approach as HMRC understood that the quantum was a live issue in the appeal. In assessing the quantum of the penalty, the penalty should be reduced to the legislative minimum of 20% of the excise duty in question to take into account the non-deliberate nature of Kent's conduct, the prompted disclosure and co-operation from Kent.

It is also worth noting the FTT's comments about HMRC's conduct in the appeal generally and specifically in relation to the determination of the wrongdoing penalties, which, in the FTT's view, did not meet the standards which taxpayers are entitled to expect in relation to dealings with their tax affairs. The FTT was highly critical of HMRC's conduct.

Why it matters:

This case revisits issues from the UT's recent decision in Hartleb in relation to determining who is "holding" excise goods and provides further helpful analysis of what the tax tribunals will take into consideration when deciding who is "holding" or "making deliveries" of excise goods. For further commentary on the Hartleb case, our February 2024 update can be viewed here.

This case is also helpful in understanding the FTT's approach to determining wrongdoing penalties. As part of this exercise, the FTT utilised its case management powers to assess the quantum of the penalty.

The decision can be viewed here.

L & L Europe Ltd v HMRC [2024] UKFTT 00144 (TC)

L & L Europe Ltd (Europe) operated online casinos allowing customers to gamble by way of games simulating slot machines and live dealer games. Whether the customer would win or lose was a matter of chance, and Europe treated all payments made to a customer on the outcome of each game as winnings whether or not the payment was greater or less than the payment to participate. All winnings were credited to the customer’s 'cash wallet' and represented a real cost to Europe. Europe also operated 'cashback' payments, which were made to customers who, over a session, had lost all of the deposits they had made in that session. Customers in that situation were entitled to activate, and thereby claim, a cashback payment calculated as 10% of the lost deposits. The right to cashback was an inherent feature of the game of chance offered by Europe.

HMRC initiated a project examining incentives offered by operators registered for Remote Gaming Duty (RGD) under Part 3, Chapter 3, FA 2014, and sent Europe an enquiry letter regarding the incentives it offered. Europe considered it was entitled to deduct the cashback payments from the RGD profits calculation under section 157, FA 2014, on the basis that they met the definition of a 'prize' in section 160, FA 2014. HMRC determined the cashback payments were not deductible because they were made to losing players and could not be said to have been 'won', and the payments were not expenditure on prizes for the purposes of the profits calculation. HMRC therefore assessed Europe to under declared RGD, which Europe appealed to the FTT.

The FTT accepted Europe's primary position that the cashback payment was a prize won for the purposes of section 157, FA 2014. The FTT held the correct interpretation of 'prize won' was any sum paid out directly as a consequence of the inherent features of the game of chance offered and delivered by the provider. The FTT considered that such an interpretation was consistent with both the purpose of the tax and the context of the language used. In that regard, the FTT was of the view that cashback was an inherent feature of the gaming offered by Europe.

Although unnecessary, the FTT considered Europe's alternative contention that the cashback payment was a return of part of the money wagered by the customer and thereby deemed to be a prize won by virtue of section 160(3), FA 2014. The FTT determined that the only coherent reading of section 160(3), within the context and purpose of RGD, was that it provided a mechanism of ensuring that RGD was charged on the real-world difference between gaming receipts and sums paid out to customers as an inherent part of gaming. Accordingly, if there was a restricted interpretation of 'prizes won', for the purposes of section 157(2), FA 2014, it was deliberately expanded through the deeming in section 160(3) to include any amount of the gaming payment returned to the customer under the contract for gaming. Thus, if a prize less than the stake was not a 'prize won' in a pure sense, in the view of the FTT, it should be treated as such by section 160(3) and similarly for a cashback, which represented a real cost to Europe that was contractually and economically the return of part of a gaming payment from the customer.

Why it matters:

RGD is often considered a somewhat niche area of taxation and, unsurprisingly, the tax tribunals and courts have not been called on to consider the relevant legislative provisions on many occasions. The FTT's decision therefore provides some helpful clarity to operators in the gaming industry in relation to the correct interpretation of those provisions.  

The decision can be viewed here.