The Upper Tribunal (Rajah J and Judge Rupert Jones) has issued its judgment in the case of Caerdav v HMRC, rejecting a aviation repair and maintenance company’s appeal against a finding that it owed over £330,000 in customs duty and VAT. The judgment is available here.
The case provides a useful analysis of several important aspects of law and procedure as outlined below:
- the operation of EU special customs procedures;
- the basis for remission of customs debts pursuant to the Terex principle and Article 120 of the Union Customs Code;
- the relevance, if any, of proportionality to VAT and customs assessments; – how an appellate tribunal will approach challenges to findings of fact and discretionary case management decisions.
The UT’s approach to the substantive and jurisdictional issues around legitimate expectation may be of most interest to practitioners – see in particular paragraphs 143-175.
Jim Duffy was instructed by Heather Wong to represent HMRC before both the First-tier and Upper Tribunals.
The facts of the case concern an aircraft that, in 2016, travelled from Tanzania to the United States via Bulgaria, the UK and Ireland. It was imported to the UK by Caerdav on 15 November 2016 for relatively minor repair and maintenance work.
The company proceeded at the time on the basis that it had in place an ‘End Use Authorisation’ (EUA) meaning that instead of being liable for a customs and VAT debt amounting to 2.7% of the value of the aircraft, its liability amounted to 0%. It became apparent subsequently, however, that Caerdav had allowed its EUA to lapse, meaning that the debts arose on the basis of the higher percentage. This meant that despite its work on the aircraft resulting in a payment of around £1,500, Caerdav faced a tax bill of some £330,000.
Caerdav did not apply for renewal of its EUA until April 2018.
Before the FTT, Caerdav had argued that when the aircraft arrived at its warehouse in St Athan it remained subject to a customs special procedure – ‘inward processing’. The evidence showed that it had entered that process when it arrived in Sofia, Bulgaria the previous month.
The first part of the dispute related to what happened next. Caerdav argued that it had never left this procedure, whereas HMRC pointed to documentation from the Bulgarian national customs authority that, HMRC said, showed that the special procedure was discharged once the aircraft had left the EU by (in all probability) flying through Serbian airspace en route to St Athan.
Caerdav also argued that they had a legitimate expectation that no customs duty or VAT arose. This was based on statements contained within two letters sent by an officer of HMRC in October and November 2017.
The company also submitted that the debts ought to be remitted pursuant to the Terex principle and/or on the grounds of equity under Article 120 of the Union Customs Code.
Further, relying on the EU law principle of proportionality, they pointed to the mismatch between the profit they had derived from their work on the aircraft and the relatively large customs duty and VAT bills.
Tribunal Judge McKeever rejected Caerdav’s appeal.
Caerdav were granted permission to appeal on six, somewhat overlapping grounds. They alleged that the FTT had erred in the following respects:
- By holding that the aircraft was no longer subject to the inward processing special procedure once it left EU airspace. Caerdav argued that when the aircraft travelled from Sofia to Wales it was being exported indirectly to the US via St Athan and Shannon, as opposed to directly from Sofia to the United States.
- By holding that the customs debt could not be remitted on the grounds of equity under Article 120 UCC.
- By holding that a legitimate expectation did not arise as a matter of EU law.
- By failing to take any account of proportionality in its decision.
- By holding that (a) it did not have jurisdiction to consider legitimate expectation in the particular statutory context, (b) a legitimate expectation could only arise as a result of a ‘ruling’ by HMRC; and (c) no legitimate expectation arose on the facts.
- In the exercise of its discretion when considering whether to allow the Appellant to dispute the amount of the customs debt (i.e. whether to allow the Appellant to pursue an argument not raised before the latter stages of the hearing).
The Upper Tribunal’s judgment
The ‘inward processing’ point involved a detailed analysis of the provisions of the then-applicable EU rules, found in the Union Customs Code and related Regulations.
The UT stressed that this was a challenge to a finding of fact by the FTT. As such, it had to meet the high threshold for such challenges set out in the authorities.
The appellate tribunal rejected all of Caerdav’s challenges to Judge McKeever’s factual findings. There was “ample material on which the FTT could properly make those findings.”
It was common ground that a debt could only be remitted under Article 120 where there were “special circumstances” and “no obvious negligence” on the part of the taxpayer. The UT rejected the assertion that either of these strands was made out.
Of particular note, it found that there was “no basis in law” for Caerdav’s assertion that there was a burden upon HMRC to show that there was obvious negligence.
But even if there had been, such a burden would have been comfortably discharged on the facts of the case, Caerdav having neglected to renew its EUA then failed to do remedy the situation when it was raised by HMRC.
In any event, the UT did not interfere with the FTT’s decision that there were no ‘special circumstances’ in this case.
Caerdav sought to argue that the FTT had failed to consider properly the principle of legitimate expectation as it applied in EU law.
In particular, it argued that it was not necessary in order for the principle to apply for the taxpayer to have sought a ‘ruling’ from the tax authority. Caerdav submitted that the tribunal judge had been wrong to consider that she had no jurisdiction to consider legitimate expectation, and argued that legitimate expectation applied on the facts.
The judgment contains a detailed analysis of the domestic and EU authorities on legitimate expectation.
The UT accepted that the free-standing substantive EU law concept of legitimate expectation may apply to the question of remission under Article 120 UCC, but that this did not add to the analysis, as ‘special circumstances’ would embrace a wide range of factual circumstances, including those that might give rise to a legitimate expectation. The consideration of that concept, the UT found, “does not give any additional life top the consideration of special circumstances. In other words, any promise or statement made by a customs authority to a taxpayer which might be capable of being relied upon as giving rise to a legitimate expectation for EU law purposes would also be capable of being relied upon as giving rise to special circumstances for the purpose of Article 120. Therefore, there may be a distinction without a difference.”
It went on, in any event, to reject the assertion that a legitimate expectation was made out on the facts, before dealing with the jurisdictional question, concluding that the FTT was entitled to find that the issue of legitimate expectation fell outside its jurisdiction (paras 150-175).
The UT accepted Jim’s submission that this was really a challenge to the EU-wide system for the assessment of VAT and customs duty, rather than an attack upon the approach of the FTT. It was the EU legislation that required VAT and customs duty to be charged as a percentage of the value of the imported goods.
It then adopted his submissions as to “the importance of that ‘wide lens’ approach to proportionality”, and how it was illustrated by the facts of this case (paras 136-137).
The challenge to the amount of the debts
Finally, the UT endorsed the way in which the FTT had dealt with Caerdav’s very late attempt to challenge the amount of the debts, all the while stressing the “generous ambit of discretion entrusted to first instance judges” taking case management decisions (para 184).