Petmaster Ltd v Revenue and Customs (Third country Fulfilment House Due Diligence Scheme - seizure of goods) [2024] UKFTT 718 (TC) (01 August 2024)

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Petmaster Ltd v Revenue and Customs (Third country Fulfilment House Due Diligence Scheme - seizure of goods) [2024] UKFTT 718 (TC) (01 August 2024) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2024/TC09258.html Cite as: [2024] UKFTT 718 (TC)

DECISION

Introduction

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

2. 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.

3. 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.

Preamble

4. 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.

5. 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.

6. 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.

7. 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').

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

Background

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

The Fulfilment House Due Diligence Scheme is part of a package of measures announced at Budget 2016 that will disrupt and deter abuse by some overseas businesses selling goods to UK customers via online marketplaces. Fulfilment businesses in the UK will have to register with HM Revenue and Customs from 2018, keep certain records and carry out robust due diligence checks on their overseas customers. This will make it more difficult for non-compliant overseas businesses to trade in the UK and will enable HMRC to identify and tackle them more easily. HMRC will publish the register to allow businesses to check whether they are dealing with compliant fulfilment businesses.

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

The Law

11. 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

12. 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:

(1) For the purposes of this Part a person carries on a third country goods fulfilment business if the person, by way of business—

(a) stores third country goods which are owned by a person who is not established in a Member State, or

(b) stores third country goods on behalf of a person who is not established in a Member State,

at a time when the conditions in subsection (2) are met in relation to the goods.

(2) The conditions are that—

(a) there has been no supply of the goods in the United Kingdom for the purposes of VATA 1994, and

(b) the goods are being offered for sale in the United Kingdom or elsewhere.

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

(1) A person may not carry on a third country goods fulfilment business otherwise than in accordance with an approval given by the Commissioners under this section.

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

4.—(1) An application must be made to the Commissioners—

(a) for an approval to carry on a third country goods fulfilment business, or

(b) to vary any condition or restriction to which an approval is subject.

15. 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.

Businesses using a third country FH

16. 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:

A company resides ... where its real business is carried on ... and the real business is carried on where the central management and control actually abides.

17. 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).

18. 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):

1(1) A person becomes liable to be registered under this Schedule at any time if conditions A to D are met.

(2) Condition A is that—

(a) the person makes taxable supplies, or

(b) there are reasonable grounds for believing that the person will make taxable supplies in the period of 30 days then beginning.

(3) Condition B is that those supplies (or any of them) are or will be made in the course or furtherance of a business carried on by the person.

(4) Condition C is that the person has no business establishment, or other fixed establishment, in the United Kingdom in relation to any business carried on by the person.

(5) Condition D is that the person is not registered under this Act.

...

19. 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.

20. It was therefore a 'non established taxable person' ('NETP').

Seizure, detention and forfeiture of goods

21. Section 54 is headed Forfeiture and states:

(1) If a person—

(a) carries on a third country goods fulfilment business, and

(b) is not an approved person, any goods within subsection (2) are liable to forfeiture under CEMA 1979.

(2) Goods are within this subsection if—

(a) they are stored by the person, and

(b) their storage by the person constitutes, or has constituted, the carrying on of a third country goods fulfilment business by the person.

22. The reference to CEMA 1979 is to the Customs and Excise Management Act 1979 ('CEMA').

23. 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.

24. 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):

139 Provisions as to detention, seizure and condemnation of goods, etc

(1) Any thing liable to forfeiture under the customs and excise Acts may be seized or detained by any officer or constable or any member of Her Majesty's armed forces or coastguard.

(1A) A person mentioned in subsection (1) who reasonably suspects that any thing may be liable to forfeiture under the customs and excise Acts may detain that thing.

(1B) References in this section and Schedule 2A to a thing detained as liable to forfeiture under the customs and excise Acts include a thing detained under subsection (1A).

(2) Where any thing is seized or detained as liable to forfeiture under the customs and excise Acts by a person other than an officer, that person shall, subject to subsection (3) below, deliver that thing to an officer.

...

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

Notice of detention

(1) The Commissioners must take reasonable steps to give written notice of the detention of any thing, and of the grounds for the detention, to any person who to their knowledge was, at the time of the detention, the owner or one of the owners of the thing.

(2) But notice need not be given under sub-paragraph (1) if the detention occurred in the presence of—

(a) the person whose offence or suspected offence occasioned the detention,

(b) the owner or any of the owners of the thing detained or any servant or agent of such an owner, or

(c) in the case of any thing detained on a ship or aircraft, the master or commander.

26. 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.

27. 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):

152 Powers of Commissioners to mitigate penalties, etc.

The Commissioners may, as they see fit—

(a) ...

(b) restore, subject to such conditions (if any) as they think proper, any thing forfeited or seized under those Acts; or

(c) ...

(d) ...

...

The powers of the Tribunal on appeal

28. 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.

29. Section 16 (4) of the 1994 Act states:

(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 review or further review as appropriate of the original decision;

...

30. 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.

31. 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.

32. 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:

... the correct approach to determine the question as to whether the decision concerned could not reasonably have been arrived at is that set out in Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd [1980] 2 WLR 753 at 663 which is to address the following questions:

(1) Did the officers reach decisions which no reasonable officer could have reached?

(2) Do the decisions betray an error of law material to the decision?

(3) Did the officers take into account all relevant considerations?

(4) Did the officers leave out of account all irrelevant considerations?

... in Balbir Singh Gora v C&E Comrs [2003] EWCA Civ 525, Pill LJ accepted that the Tribunal could decide for itself primary facts and then go on to decide whether, in the light of its findings of fact, the decision on restoration was reasonable. Thus, the Tribunal exercises a measure of hindsight and a decision which in the light of the information available to the officer making it could well have been quite reasonable may be found to be unreasonable in the light of the facts as found by the Tribunal. ...

33. 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.

34. 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.

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

Findings of Fact

36. 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.

37. 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.

38. 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:

Let's apply for VAT urgently please.

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

Vat registration is mandatory once your UK sales reach £85,000.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

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

47. 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.

48. 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.

49. 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.

50. 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.

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

52. 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.

53. 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.

54. 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.

55. 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:

Seeing as the FHDDS was created to disrupt and deter abuse by some NETPs selling goods in the UK, I consider that failing to utilise an authorised fulfilment house is a significant matter. Moreover, failing to register for and pay VAT when required is a significant matter in itself. The total VAT due on the consignment in question would have been £875.52. Notably, the trader previously imported a consignment on 18 January 2022 with an invoice value of £2,460.00 on which £492.00 VAT should have been paid. This means that over these two imports, Petmaster have failed to pay £1,367.52 VAT. (emphasis added)

56. He went on to find:

Petmaster have committed two significant errors, by importing goods to an unapproved fulfilment house and failing to pay the applicable VAT. NETPs who wish to import goods to a UK fulfilment house must be VAT registered and perform due diligence to determine whether the fulfilment house is approved. Traders can do this seamlessly using the 'Fulfilment House Due Diligence Scheme (FHDDS) registered businesses list' on gov.uk: https://www.gov.uk/government/publications/fulfilment-house-due-diligence-scheme- registered-businesses-list. (emphasis added)

57. He ended his review under the heading My conclusion:

Petmaster are a NETP and chose to store their goods in an unauthorised fulfilment house. As such, their goods were liable to forfeiture under Section 54 of the Finance (No. 2) Act 2017 and subsequently seizure under Section 139 of CEMA. Moreover, as a NETP, Petmaster have failed to pay the VAT owed on their imports which could afford an unfair commercial advantage over competitors. Non restoration of goods is appropriate in this circumstance as a means of penalisation and assertion of Petmaster's responsibilities as a NETP. The decision is upheld. (emphasis added)

58. 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:

It is incorrect, and has been taken into account when it shouldn't have been.

59. 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'.

Discussion and analysis

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

61. HMRC submit that:

(1) the officers reached a decision that was not unreasonable. Officer Edwards and the review applied HMRC's lawful policy and on the facts it was reasonable and proportionate to refuse restoration, in the promotion of compliance. In particular, that the responsibility to ensure the FH was approved was Petmaster's and that it was not reasonable to rely on the FH for that information. There is an online register capable of being accessed from Turkey with the information on it. Even if Petmaster were misled about the need to register for VAT that would not alter the reasonableness of the decisions.

(2) The decisions betray no error of law. The say Petmaster's case is one - in effect of 'innocent actor'. Officer Edwards confirmed that despite proven ownership of the goods it would not have affected his decision. Equally, the error of the reviewing officer regarding the import VAT does not infect the decision.

(3) The officers took account of all relevant considerations. They point to the HMRC policy. They rely upon the seizure in a non-approved FH and the wider non-compliance by Petmaster in relation to lack of VAT registration.

(4) The officers left out of account all irrelevant considerations. Here there simply was not enough evidence regarding the financial impact to warrant taking this into account.

62. 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.

63. 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).

64. 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:

(1) The first reason given in the original decision was that it had not been proven that Petmaster was the owner of the goods. In the review decision that was held to have been wrong and Petmaster had shown they were the owners.

(2) In the restoration decision on review the officer made a (now admitted) error in finding that Petmaster had not paid the import VAT on this and a previous consignment. This he described, somewhat ironically as things have turned out, as one of two 'significant errors'. That was a critical mistake, given the importance the review officer attaches to it in the body of his letter and in his conclusion. It was not a rational finding to have made and, as a result, is an error of law infecting the decision.

(3) We have found that Petmaster, through the agency of its director Mr Oguz, was - to use HMRC's phrase - an 'innocent actor'. That means, in the circumstances of this case:

(a) He is a Turkish speaker with nearly no English at all. He put years of savings into Petmaster.

(b) He was given erroneous legal advice about the need to register himself and then Petmaster for VAT in the United Kingdom. Had he received correct advice he would have registered Petmaster for VAT.

(c) Petmaster did pay its import VAT. As a result it did not, in the words of the restoration decision have an unfair commercial advantage over competitors. Rather where it knew what is obligations were, it met them.

(d) Petmaster was misled about the approved status of the FH by the FH. Had it known it would not have stored its cat litter there.

(e) Petmaster had an intermediary assisting it and an accountant in the UK at the time of the import. None of those advised Petmaster about the register of FHs.

(f) In those circumstances it was reasonable for Petmaster, through Mr Oguz, not to search for a register he had no idea existed. Put another way, we do not accept HMRC's submission that, in this case, a reasonably careful importer of goods would have made themselves aware of these regulations.

(4) We accept on the evidence we heard the financial impact about non-restoration or payment of compensation in this case given the amount invested the commitments Mr Oguz has.

65. 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.

66. 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.

Conclusion

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

68. In doing so we make the following directions:

(1) The original decision and the restoration decision cease to have effect

(2) The restoration decision is to be remade by an officer with no prior involvement in the case

(3) That officer will take into account our findings set out in paragraph 64 above.

Right to apply for permission to appeal

69. 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.

NATHANIEL RUDOLF KC

TRIBUNAL JUDGE

Release date: 01^st AUGUST 2024

First-tier Tribunal (Tax)

Notice of detention