Appeal Numbers MAN/2008/0521

[2010[ UKFTT 181

TC00485

Appeal numbers MAN/2008/0521

CUSTOMS DUTIES — sales by retail of goods placed in temporary storage— terms of sale providing that retail customer becomes importer and seller his agent — duty on individual items below de minimis threshold — whether such sales permissible — no

VALUE ADDED TAX — import VAT payable by retail customer based on customs value and less than VAT due on conventional retail sale — reduction in duty and VAT for benefit of seller — whether arrangements abusive — yes — full amount of duty and tax payable — appeal dismissed

FIRST-TIER TRIBUNAL

TAX

SELECTIVE MARKETPLACE LIMITEDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: Judge Colin Bishopp

Sitting in public in Manchester on 1 and 2 March 2010

Tim Brown, counsel, instructed by Elvin & Co, solicitors, for the Appellant

Melanie Hall QC and Philip Woolfe, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

1

DECISION

1.This is a consolidatedappealby Selective Marketplace Limited (“SML”) against three linked decisions of the Commissioners, leading to an assessment to VAT of £714,411, dated 6 May 2008, a post-clearance demand for customs duties of £104,283.80, dated 7 July 2009, and a further post-clearance demand for £22,243.57, dated 2 November 2009.The assessment and the demands are linked in that they all relate to SML’s imports of goods from outside the European Union in the period from July 2006 to November 2007, a period during which SML employed arrangements I shall describe later by which some of its sales to its retail customers were made.

2.SML is a mail order retailer although, like most other companies in that type of trade, it now makes many of its sales by telephone or through the internet, and by means of newspaper “special offers”. Most of the goods it sells are imported. It was dependent for the performance of import formalities on the assistance of agents until, in 2006, it applied for and was granted permission to operate its own customs warehouse and to use various customs procedures—particularly, Customs Freight Simplified Procedures or CFSP and Local Clearance Procedures—among which was the facility central to this appeal, the right to place goods in temporary storage. The scheme depended on SML’s selling goods it had placed in temporary storage, while they were still there, to its retail customers. It argues that, by virtue of the terms pursuant to which those sales were effected, the customers became the importers. Because of the relatively modest value of the goods the customers were liable to pay, for reasons to which I shall come, no customs duty, while SML, had it been the importer, would have been required to account for duty. If the scheme succeeded the customer would be required also to pay less VAT than would have been the case had SML been the importer. Whatever the outcome of the appeal, I am not required to deal with the detail of the assessment and the demands.

3.In brief, SML’s argument is that the arrangements were lawful and effective, that all of the VAT and duty for which it was liable have been paid, and that the assessment and demands should be discharged. It does not deny that the purpose of the arrangements into which it entered was to reduce the overall burden of tax and duty, and that it, and not its customers, was the beneficiary of that reduction: the customer paid the same price whether or not he was the importer or, as the Commissioners say, supposed importer. It maintains that sales by retail from temporary storage were a legitimate practice and that the reduction of tax and duty were the natural, rather than (as the Commissioners contend) a contrived consequence of such sales. Its case is that it decided to stop making sales in this manner in July 2007 because of perceived customer concerns and not, as the Commissioners suggest, because it had by then become clear that they were taking steps to prevent what they considered to be an abusive practice.

4.The Commissioners’ position is that the arrangements did not, as a matter of fact and law, succeed in their admitted purpose of reducing the VAT and duty for which SML would otherwise have been liable to account; alternatively that the arrangements amounted to an abusive scheme and that the tax advantage they were designed to achieve must be denied. Their perception of the arrangements was set out in two letters, dated 5 and 19 March 2008, as precursors to the assessment and the demands, which are designed to recover the difference between the amounts of duty and tax which SML has paid and the amounts which the Commissioners maintain should have been paid.

5.I heard the oral evidence of Ian Dudley, a customs duty adviser who hadbeen engaged by SML to assist it in its securing permission to use its own customs warehouse and who suggested this method of selling to SML, of Robert Litchfield, SML’s chief executive officer, and of Ann Flynn, an HMRC officer with responsibility for the Commissioners’ policy in relation to temporary storage. SML was represented by Tim Brown, counsel, and the Commissioners by Melanie Hall QC, leading Philip Woolfe.

The arrangements

6.There was no dispute between the parties about the nature of the arrangements. Since it is not necessary for the purposes of this decision to set out all of the detail I have assumedin the description which follows that the reader has some familiarity with thecustoms procedures to which I refer. The dispute relates to thelawfulness and effectiveness of the arrangements, with which I shall deal in the next section.

7.The starting point for consideration of the arrangementsis art 48 of Council Regulation 2913/92 (“the Customs Code” or “the Code”):

“Non-Community goods presented to customs shall be assigned a customs-approved treatment or use authorised for such non-Community goods”.

8.In other words, goods entering the United Kingdom from outside the European Union (which, by virtue of other provisions of the Code not in issue here, must be presented immediately to customs) should normally be immediately entered to a customs procedure, usually to free circulation or to customs warehousing. As an alternative they may be the subject of a summary declaration and placed into temporary storage, while the owner decides what is to be done with them or makes any necessary arrangements for them to be entered to a customs procedure. While the goods are in temporary storage they are treated as not having entered the customs territory of the Community. Article 49 of the Code provides that

“1.Where goods are covered by a summary declaration, the formalities necessary for them to be assigned a customs-approved treatment or use must be carried out within—

45 days from the date on which the summary declaration is lodged in the case of goods carried by sea;

20 days from the date on which the summary declaration is lodged in the case of goods carried otherwise than by sea.

2.Where circumstances so warrant, the customs authorities may set a shorter period or authorise an extension of the periods referred to in paragraph 1. Such extension shall not, however, exceed the genuine requirements which are justified by the circumstances.”

9.As those provisions indicate, goods may remain in temporary storage for a limited time which may be extended only on proven need. Because of the manner in which the arrangements were structured all of the goods relevant to this appeal were sold before the initial time limit expired and, I understand, no extensions of time were sought.

10.Articles 50 to 53 together make up Chapter 5 of Title III of the Customs Code, a chapter entitled “Temporary storage of goods”. The articles impose various conditions and restrictions on temporary storage, the only one of immediate relevance here being contained in art 52:

“Without prejudice to the provisions of Article 42, goods in temporary storage shall be subject only to such forms of handling as are designed to ensure their preservation in an unaltered state without modifying their appearance or technical characteristics.”

11.Article 42 allows for samples to be taken, and is not material in this case.

12.It will be necessary to examine the nature of temporary storage within the meaning of the Code in more detail later. The mechanical, and for present purposes essential, consequence of the placing of goods into temporary storage is that the duty and VAT ordinarily due on importation are not immediately payable. Customs duty becomes payable if the goods are released from temporary storage to free circulation, usually for the purpose of sale (an event which gives rise to a “duty point”), while if they are instead transferred to a customs warehouse, the duty point and, with it, the obligation to pay the duty, are deferred. VAT becomes payable only when there is a duty point: see arts 70 and 71 of the Principal VAT Directive (2006/112/EC), implemented in the UK by the Value Added Tax Act 1994, s 15(2)(a).

13.Most of SML’s imports were released into free circulation by being transferred to SML’s ordinary warehouse for sale in what might be considered the conventional way. SML paid duty and import VAT on the goods as they were released. The duty was, of course, charged and accounted for at the prevailing rate and the import VAT was calculated by reference to the value of the goods, including the duty. SML was able to recover the import VAT as input tax, but was obliged to charge VAT to its customer by reference to the retail price. In those cases the results were that customs duty of what the respondents agree is the correct amount was paid, and that, in net terms, SML accounted to them for VAT on the ordinary retail price.

14.Customers’ orders were, usually, satisfied by the allocation of goods in stock (that is, goods which had been imported by SML and on which duty and import VAT had been paid, in the conventional manner), but sometimes a customer ordered goods which were temporarily out of stock. It was in these cases, during the relevant period, that SML endeavoured to meet the order by making a supply from its next consignment which included the item required, while the consignment was still in temporary storage.

15.As a first step in its implementation of the arrangements SML’s terms and conditions of sale were amended to provide (if they were effective) that the customer was to be the importer of the goods, but that SML would act as his or her agent, undertake all the necessary formalities and indemnify him or her against all the duty and VAT which might be payable. There is, in fact, some doubt about theprecise wording adopted by SML; surprisingly, it was unable to produce clear evidence of the change it made, by addition of a rider,to its terms and conditions. The confusion was in part attributable to the fact that SML uses different trading names, and in part to a failure to effect timely amendments to the websites on which the terms were posted. SML’s catalogues referred the reader to the website and did not reproduce the terms and conditions. Since I heard no argument on the matter I shall assume for present purposes, doubtful though it may be, that the revised terms were effectively incorporated in SML’s contracts with its customers. A version of the wording which was produced and which I assume for present purposes accurately represents what was adopted(it does not seem that anything turns on the slight differences between the versions I saw) is as follows:

“The goods that we sell may include goods that have been brought into the United Kingdom from outside the European Union on which customs duty and import VAT have not been paid at the time title passes to the purchaser.

1. The amounts payable by you to us in respect of the goods in question will remain the same but we will, as your agent, pay any applicable customs duty and import VAT on your behalf as well as dealing with the customs clearance formalities referred to in paragraph 3 below.
2. If you wish to return these goods we will purchase these from you for the same price that you paid for the goods plus any applicable customs duty and import VAT and accordingly you will receive the same amount as you paid to us.
3. Although responsibility for the payment of applicable customs duty, import tax and preparationof customs clearance submissions lies with you, this however is merely a formality and we as agents will pay any and all of these taxes on your behalf, as well as deal with any customs clearance formalities.

Title to and risk in all goods purchased from us will pass to you once the goods have been picked out of the company’s warehouse. If you are registered for VAT you must notify us at the time you place your order so that we can ensure you are only supplied with Free Circulation Goods.”

16.Orders for out-of-stock items were accumulated in date order. If another customer returned an item as unsuitable—SML had a policy of allowing customers to return goods not only because they were, for example, of the wrong size but also because of a simple change of mind—the returned item was supplied to the first customer on the list who had placed an order for an item of that description. Thus it could not be said, when the order was accepted, whether it would eventually be met from a returned item(which was, of course, already in free circulation) or from temporary storage. The customer, too, was not told, when the item was delivered, whether his order had been met from stock or from temporary storage. He thus had no means of knowing, as SML accepts, either before or after title had passed to him whether he was the importer. That remained the case if, as the terms and conditions allowed, he returned the item; the procedure for making a refund or giving credit was exactly the same whether the goods had been supplied to him from stock or from temporary storage. I was toldthat the number of occasions on which customers had informed SML that they were VAT-registered was negligible.The differences in treatment of VAT-registered customers are peripheral to the issues in this case but I shall comment briefly about them at a later stage.

17.When a consignment arrived it was first placed in temporary storage. The items within it which were the subject of outstanding orders were identified and removed. Each was then the subject of an individual import entry, necessitating the creation of a notional account—as it was described to me, a “Pseudo-TURN” (or trader’s unique reference number)—used for that import only. SML obtained, through Mr Dudley, computer software which was capable of handling entries in this manner and of transferring them to the Commissioners’ computer system which, at the time, accepted individual import declarations of this kind. SML’s computer was programmed so that as many orders as possible were met from temporary storage before the time limit expired, at which point the computer declared the residue of the consignment to free circulation, and SML accounted for duty and VAT on that residue in the conventional way.

18.The first objective of the arrangements was to take advantage of art 29 of the Customs Code, providing that “[t]he customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community …” and art 147of Commission Regulation 2454/93/EEC (“the Implementing Regulation”), providing that “[f]or the purposes of Article 29 of the Code, the fact that the goods which are the subject of a sale are declared for free circulation shall be regarded as adequate indication that they were sold for export to the customs territory of the Community”. The combined effect of these provisions, if SML’s arrangements succeeded in their objective and the customer was to be regarded as the importer, is that he was deemed for the purpose of the assessment of customs duty to have paid the price SML had paid to its own supplier.The respondents accept that, if the arrangements succeeded, that was their effect and I shall not, therefore, elaborate on the reasons, with which most readers of this decision will be familiar.

19.The first consequence of effective implementation of that feature of the arrangements was that art 868 of the Implementing Regulation was engaged. It provides that“Member States need not enter into the accounts amounts of duty of less than ECU 10. There shall be no post-clearance recovery of import duties or export duties where the amount per recovery action is less than ECU 10.”This article, as its wording indicates, is permissive;the concession was introduced in the United Kingdom with effect from 1 July 2004. As almost all of the goods sold by SML, treated as single items, attracted duty of less than ECU 10 (€10), at least when it was assessed by reference to the price SML had itself paid, the customer—or SML on his or her behalf—was not required to pay any duty at all.