[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 LIMITED	Appellant

- and -

		THE COMMISSIONERS FOR HER MAJESTY’S
		REVENUE AND CUSTOMS	Respondents

				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

DECISION
1.	This is a consolidated appeal by 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 had been 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 assumed in the description which follows that the reader has some familiarity with the customs procedures to which I refer. The dispute relates to the lawfulness and effectiveness of the arrangements, with which I shall deal in the next section. 
7.	The starting point for consideration of the arrangements is 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 the precise 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 preparation of 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 told that 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 147 of 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. 
20.	The second consequence was that the import VAT payable by the customer was less than the amount for which SML would ordinarily have had to account. As I have said, import VAT is charged on the aggregate of the value of the goods and the customs duty; since the retail customer was required to pay no duty the VAT liability was correspondingly reduced. Ordinarily, the import VAT was of no immediate concern to SML because it could claim credit for the same amount as input tax, but since the import VAT became (if the scheme succeeded) the customer’s liability, it could not do so. It was, however, required by its terms and conditions of sale to discharge the VAT and it was in its interests, therefore, to minimise the amount payable.
21.	The other objective of the arrangements was the elimination of any further VAT liability. Ordinarily SML was required to account for VAT on the full retail price. If it succeeded in selling the goods before they entered the customs territory of the European Union—and goods in temporary storage are deemed not to be within the customs territory—its sale would be outside the scope of VAT, and it would correspondingly have no liability of its own. Thus the only VAT payable would be the import VAT. Since the retail price was, of course, invariably greater than the base value for the assessment of import VAT, the price SML had paid to its own supplier, SML made a substantial net saving. The respondents also accept that, if the arrangements succeeded, that was their effect. 
22.	SML decided in July 2007 to abandon use of the arrangements. I shall return to the reasons, which as I have indicated were a matter of some dispute, at a later stage. Although SML thereafter accounted for VAT in a manner the respondents accept to be correct it failed, by mistake, to reorganise its accounting for customs duty and the second of the post-clearance demands relates to the duty for which, the respondents say, SML should have accounted between July and November 2007, when the appropriate correction to the procedures was made.
Were the arrangements effective?
23.	The Commissioners’ case, and the first underlying reason for the assessment and the demands, is that the arrangements failed in their objective because sales by retail from temporary storage were not permitted; the consequence of a sale, or attempted sale, from temporary storage was that the seller was to be treated as having released the goods to free circulation, and became liable to account for duty and VAT in the ordinary way. They accept that the relevant legislation (as it was in force at the time—it is expected to be replaced soon by rather different wording which makes the matter clear) did not state, in terms, that sales from temporary storage could not be made but, they say, it is apparent nevertheless that such sales were not possible. The appellant’s argument is that there is nothing in the legislation which could be taken, even inferentially, as a prohibition and, moreover, the respondents’ own interpretation of the legislation, as it is explained in various publications, supports its case. In the absence of prohibition it was entitled to make such sales, and to benefit from their natural consequences. 
24.	Mr Brown pointed to para 6.8 of the Commissioners’ Notice 760, “Customs Freight Simplified Procedures”, published in April 2003, in which appears the sentence “The consignment can remain, in whole or in part, in Temporary Storage for a period not exceeding twenty days …” and to the condition attached to the same paragraph, entitled “Handling of goods in Temporary Storage”, and reading “goods in Temporary Storage may only undergo such forms of handling e.g. unpacking and taking account of the goods, to ensure their preservation in an unaltered state without modifying their appearance or technical characteristic.” Those observations, evidently designed to reflect arts 49 and 52 of the Customs Code respectively, were not consistent with the contention made in the decision letters and in the Commissioners’ statement of case that a consignment must remain intact within temporary storage, and could be removed to free circulation only as an intact unit, with the consequence that the purported sales amounted to a breach of SML’s authorisation. SML had not modified the goods in any way; it had done no more than extract individual items for temporary storage, but para 6.8 made it clear that it was permissible to do so. 
25.	In September 2007, shortly after SML decided to abandon use of the arrangements, the Commissioners published a Joint Customs Consultative Committee Paper, (07) 37, in which appear the following passages:
“There have been several reports of instances where large consignments of goods are being imported but then broken down in temporary storage and cleared to free circulation in a piecemeal fashion …. This has had the effect of triggering the duty waiver under [art 868] where the value of the cleared goods falls below the 10 Euro de minimis. This clearly goes against the spirit of the legislation and is an abuse of the regulations relating to the handling of goods whilst they are in temporary storage.
Article 52 of [the Customs Code] restricts forms of handling for goods in temporary storage to ‘such forms of handling as are designed to ensure their preservation in an unaltered state without modifying their appearance or technical characteristics’.
This Article is subject to strict interpretation and prevents the unpacking, repacking or re-organisation of the goods where the objective is anything other than the preservation of the goods. The usual forms of handling contained in Annex 72 of [the Implementing Regulation] which include unpacking and re-packing does not apply [sic] to goods whilst they are in temporary storage. Such de-consolidation must be carried out after goods have been cleared to a customs approved treatment or use such as Free Circulation or Customs Warehousing.
In light of the above regulations, breaking up of individual packages will not be permitted in temporary storage unless it is necessary to do so for examination or preservation purposes.
The Customs Code does not allow part clearance of a consignment from temporary storage as Article 184 of the [Implementing Regulation] prescribes that goods covered by a summary declaration, whether unloaded or not, must be ‘re-presented intact’ until such time as they are ‘assigned a customs-approved treatment or use’. However, we understand that occasions may arise where there is a genuine need to clear only part of a larger consignment from temporary storage. In order to facilitate trade in such circumstances, Customs will permit part clearance of a large consignment, as long as no breaking up of individual packages is involved in the process and the action is proportionate in all the circumstances.”
26.	SML did not break up individual packages, Mr Brown argued, and even if (which he did not concede) what SML did might have been, as the Paper put it, “against the spirit of the legislation”, it was not contrary to the letter of the legislation, nor contrary to the Commissioners’ own guidance. Indeed, in November 2007 the Commissioners issued a further CFSP Information Paper setting out new procedures for use by traders such as SML which were removing part consignments from temporary storage, while the replacement version of Notice 760, issued in November 2008, included, at para 6.9, the statement that “Customs will permit part clearance of a large consignment, as long as no breaking up of individual packages is involved in the process and the action is proportionate in all the circumstances”, a clear indication that part removal was not merely not prohibited, but permitted. It was not until September 2009, no doubt in anticipation of the coming into force of the replacement legislation, that the Commissioners issued a further Paper indicating that part removals from temporary storage would be prohibited, but even then only from 1 February 2010.
27.	The first limb of Mrs Hall’s argument was that art 52 of the Code requires the “preservation in an unaltered state” of goods in temporary storage. A sale of some items from a consignment necessarily infringes that requirement: the consignment is no longer in an “unaltered state”. Mr Brown’s interpretation of the Commissioners’ publications was wrong since it was clear from their terms that clearance of part only of a consignment from temporary storage was exceptional, to be allowed only for good commercial reasons and not as a means of securing duty waiver by taking advantage of art 868. That was apparent from another Information Paper issued in June 2003, outlining the proposed introduction of the de minimis waiver in the following February, in which it was stated that “Customs propose to introduce a waiver for amounts of customs duty not exceeding 10 euro on small consignments of goods imported into the United Kingdom from outside the Community and which are declared directly to home use and free circulation”. The requirement of direct declaration to home use necessarily disqualified goods placed in temporary storage. Although Mrs Hall did not refer to it I observe also that in the September 2007 Paper from which I have already quoted appears the sentence “Where a consignment is cleared in part under these provisions, the duty waiver will not apply, therefore traders have a responsibility to declare the correct amount of duty even when it may fall under the 10 euro waiver limit.”
28.	As Ms Flynn accepted, there is some ambiguity, to put it neutrally, in the Commissioners’ publications. She told me that although the Commissioners would allow part removal of consignments from temporary storage they would not do so, knowingly, in order to allow a trader such as SML to make retail sales; and if the Commissioners’ computer system allowed for such removals it was not by design. She conceded that such sales had been made, and not only by SML, and it was that fact which led to the September 2007 Paper. Mrs Hall, while not conceding that the publications gave any support to SML’s case, made the point that, even if they did, they could not change the law. If retail sales from temporary storage were prohibited by the Regulations, it did not matter that the Commissioners might have issued unclear guidance.
29.	In my view there is substance in that argument. It seems to me quite plain, from the tenor of the legislation, that its draftsman had not contemplated the possibility that retail sales might be made of goods while they were in temporary storage. I draw support for that proposition from observations of Advocate General Jacobs at para 49 of his opinion in Firma Söhl & Söhlke v Hauptzollamt Bremen (Case C-48/98) [1999] ECR-I 07877:
“… the sense and the objective of the legislation [ie art 49 of the Code] and its place in the system of customs duties suggest that something more than ordinary circumstances is required to justify extensions of time. The legislative purpose of the temporary storage system is to create, in respect of non-Community goods which are presented to customs and summarily declared, a limited transitional period lasting until the assignment to those goods, within tight time-limits, of a customs-approved treatment or use. The provisions governing extensions of time are not intended to enable temporary storage to be routinely prolonged and thus in effect converted to customs warehousing, which is itself a specific and distinct customs procedure requiring approval and supervision by the customs authorities.”
30.	That observation is not directly in point, since it relates to art 49 rather than art 52, but it clearly indicates that the rules relating to temporary storage are to be construed strictly. Moreover, the phrase “temporary storage” has a simple, unambiguous meaning—that the goods are stored, and that the arrangement is to be of short duration—and I have little doubt that the draftsman intended that the phrase should bear that meaning, a conclusion supported by the expected legislative changes which are designed to put the matter beyond doubt. Nevertheless, the Commissioners’ argument is that art 52, by necessary implication, prohibits the breaking up of consignments. The immediate difficulty with that argument is that it is not what the article says: it refers to goods, rather than consignments. SML was certainly breaking up consignments, by removing some items while leaving others in storage, but it was not altering the state, or modifying the appearance or technical characteristics, of the goods it removed or of those which remained. If it were necessary to interpret art 52 literally, and it were the only legislative provision in point, I would not be convinced that the draftsman has succeeded in prohibiting such sales.
31.	However, European legislation demands a purposive rather than literal interpretation. It is presumably not the primary purpose of art 52 to prohibit sales by retail from temporary storage (since the practice is not expressly prohibited and, as I have suggested, was probably not contemplated when the Code was enacted), but it is difficult to see how such sales are consistent with the obvious purposes of providing a short period of grace before goods are released to free circulation or entered to customs warehousing, and of ensuring that goods leave temporary storage in the same condition as that in which they entered. In my judgment, if a purposive interpretation is to be preferred, art 52 does convincingly support the respondents’ case that retail sales may not be made from temporary storage.
32.	Even if I am wrong in that conclusion it seems to me that the second limb of the respondents’ argument is unanswerable. It relies upon the terms of art 184 of the Implementing Regulation:
“1	Goods covered by a summary declaration which have not been unloaded from the means of transport carrying them shall be re-presented intact by the person referred to in Article 183(1) whenever the customs authorities so require, until such time as the goods in question are assigned a customs-approved treatment or use.
2	Any person who holds goods after they have been unloaded in order to move or store them shall become responsible for compliance with the obligation to re-present all the goods intact at the request of the customs authorities.”
33.	The “person referred to in Article 183(1)” is the person making an entry summary declaration, in this case SML, which was also a person “who holds goods after they have been unloaded”, since the goods were placed in its own temporary storage facility. If it succeeded in selling goods in temporary storage, it put it outside its power to comply with the article. It is true that it re-presented the goods to the customs authority, but it did so not as the “person referred to in Article 183(1)” or a person “who holds goods after they have been unloaded”, but as the (purported) new owner’s agent, an entirely different capacity. If a course of conduct makes it impossible for the person adopting it to comply with his obligations, it seems to me an obvious and inescapable conclusion that that course of conduct is not available to him. For that reason too I conclude that SML’s scheme failed, and that it is not permissible to treat the retail customer as the importer. I cannot accept Mr Brown’s argument that the definition of “importer” in s 1 of the Customs and Excise Management Act 1979, as “any owner or any other person for the time being possessed of or beneficially interested in the goods”, helps him; the definition is inclusive rather than exclusive, and cannot be interpreted so as to imply that the customer is to be treated as the importer to the exclusion of SML. In addition, I do not see how an administrative definition of this kind can override a clear provision of European law.
34.	The consequence of those conclusions must be that any removal from temporary storage of a single item, or several items, forming part of a larger consignment is to be treated as a release to free circulation by SML—as the “person referred to in Article 183(1)”—making it, rather than the end user, the importer, and creating a duty point. The sale to the customer necessarily took place after release, with the result that SML was liable to account for duty and VAT in the ordinary way. In short, the scheme was ineffective.
Abuse
35.	It is not necessary for me to determine this issue, in view of my conclusion about the effectiveness of the scheme, but as I heard argument on the subject it is appropriate I deal with it.
36.	Mr Dudley’s evidence was that he believed it to be a legitimate practice to make retail sales from temporary storage. He was aware that, in Stanley House Logistics Limited (2005, Decision C00193), the VAT and Duties Tribunal had dealt with the subject of retail sales from a customs warehouse, which were and are not permissible, but he believed that the restriction did not apply to temporary storage. His work for SML consisted of two elements: the undertaking of its own customs warehousing procedures, and the implementation of the arrangements. Although the latter would not have been possible without the former, SML did not take on its own warehousing for that reason alone. Mr Dudley also arranged the supply and implementation of computer software capable of dealing with all of SML’s procedures, including those necessitated by the use of the arrangements. He did not conceal the tax- and duty-saving objectives of the arrangements; and Mr Litchfield candidly accepted that they were employed for that purpose alone, and that they had no other commercial justification.
37.	Mrs Hall made much of the fact that SML paid Mr Dudley a substantial fee for devising the scheme, though I do not myself think that a factor of much significance. She also argued that the claimed reason for abandoning the scheme, that customers might be put off by terms and conditions which they did not understand, was not the true reason since, as emerged when Mr Litchfield gave his evidence, only one customer had enquired about the provision in the space of a year; the real reason, she said, was that SML knew that the Commissioners were looking into, and putting an end to, schemes of this kind. Again, I mention the point for completeness since I do not myself think that SML’s reasons are of great importance. Similarly I attach little significance to SML’s not having disclosed to the Commissioners, in its applications for approval as a customs warehousekeeper, that it intended to implement the arrangements, nor to the failure of the (evidently somewhat inexperienced) HMRC officer who visited SML to take early steps to prevent its use of the arrangements. In my view what matters is the substance of a scheme, rather than peripheral considerations of this kind.
38.	The leading authority on abuse in a tax context is the judgment of the European Court of Justice in Halifax plc and others v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919, in which it said:
“74	… in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75	Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in point 89 of his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.”
39.	It does not seem to me that there is any reason to think that the criteria are different when one considers a scheme which results in a saving of customs duty. Moreover, art 4(3) of Council Regulation 2988/95/EC on the protection of the European Communities’ financial interests, which applies to customs duties though not VAT, provides, in similar vein, that
“Acts which are established to have as their purpose the obtaining of an advantage contrary to the objectives of the Community law applicable in the case by artificially creating the conditions required for obtaining that advantage shall result, as the case shall be, either in failure to obtain the advantage or in its withdrawal.”
40.	Mr Brown’s argument was that the arrangements were commercially motivated and lacked the necessary degree of artificiality which must be found if abuse is to be established. There was good reason for SML to take control of its warehousing arrangements, rather than rely on agents, and it could not be said to be artificial to satisfy orders which customers had already placed as quickly as possible, even if the goods were in temporary storage. The arrangements were not contrary to the spirit or purpose of the legislative provisions; rather, SML adopted them (that is, on the assumption that sales from temporary storage were possible) in order to meet its customers’ orders without delay. It could not be said to be an abuse to take advantage of a concession (the €10 duty limit) when it was expressly authorised by art 868 of the Implementing Regulation and had been adopted within the United Kingdom; and, if the customer was the importer the VAT consequences were those prescribed by the VAT Directive and domestic legislation, about which SML had no choice: it could not be said that compliance with the Directive conflicted with its purpose.
41.	In this case, Mrs Hall argued, the purpose of the legislation was easily identified. Article 868 of the Implementing Directive is designed, not to allow importers to escape duty by breaking up consignments, but to avoid the cost of accounting for and collecting small amounts of duty; it was an administrative convenience, and not a tax relieving measure. So much was evident from its placing within a section of the Regulation which dealt with accounting for duty, and not within that part of the Regulation which dealt with the charge. It is also axiomatic, she said, that VAT is to be paid on the entire price paid by the final consumer, a proposition for which she relied on art 1(2) of the Principal VAT Directive (2006/112/EC):
“The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.
On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components.
The common system of VAT shall be applied up to and including the retail trade stage.”
42.	A scheme which resulted in the exploitation of an administrative concession and defeated the aim of the VAT Directive must necessarily be abusive if it could not be commercially justified; and there was no commercial justification for this scheme. The only purpose which SML itself had identified, she said, was to achieve a saving of duty and tax. The result SML set out to achieve was, as the ECJ put it, “contrary to the purpose” of the legislative provisions, and the scheme must be struck down as abusive. 
43.	Mrs Hall made the points, which Mr Brown did not dispute, that the scheme must be judged by reference to objective factors (see Halifax at [75] and WHA Ltd and another v Revenue and Customs Commissioners [2007] STC 1695 at [24]) and that the test is essential aim rather than sole purpose (see Ministero dell’Economia e delle Finanze v Part Service Srl (Case C-425/06) [2008] STC 3132). One should also bear in mind what Lord Neuberger said in WHA at [29], after examining the detail of the scheme in issue in that case:
“So, it may be contended, tax avoidance cannot be said to be the sole, even arguably the main, purpose of the Scheme, viewed as a whole. However, as I see it, when considering the purpose of the Scheme for present purposes, one must primarily address the aspects of the Scheme which are artificial. Otherwise, many schemes, however abusive, would succeed: indeed, on the basis of this contention, the decision in Halifax might very well have gone the other way. It seems to me that I am supported in this opinion by the reference in para 80 of the judgment in Halifax to ‘normal commercial operations’, and the requirement in the following paragraph that, where abuse is established, the national court must ‘determine the real substance and significance of the transactions concerned.’ This plainly seems to envisage that a scheme may be abusive while having a genuine underlying commercial purpose.”
44.	I am willing to accept that SML’s undertaking its customs procedures itself, rather than by the employment of agents, was commercially driven, it being of benefit to SML to dispense with the services of agents, and was not motivated by the “mere attainment of tax advantages”. It is true, as Mrs Hall pointed out, that Mr Dudley’s letter to Mr Litchfield of 19 May 2005 in which he listed the steps to be taken in order to secure CFSP and other authorisations, to implement the appropriate warehousing regimes and to begin selling goods from temporary storage can be read as if the latter was the only real purpose of SML’s undertaking its own customs procedures, but I accept the evidence I heard that, although its doing so made the scheme possible, it was not the only reason SML decided to undertake those procedures. I heard some evidence about the value to SML, independently of the scheme, of temporary storage facilities. It was not sufficient for me to make a confident finding of fact but I assume for present purposes that SML did make legitimate use of those facilities. However, it does not seem to me to matter whether one takes the scheme to be the whole project (including the undertaking of conventional customs warehousing activities) or looks only at the arrangements for the sale of goods from temporary storage, since one inevitably arrives at the same conclusion.
45.	There was no doubt, in Halifax, that there was a genuine underlying need for a new building; what was abusive was the structuring of the contracts for the building work and for the passing of title. Similarly, here, it makes no difference in my view that SML has a genuine need for its own customs warehouse and for temporary storage facilities; it is the structure of the arrangements for its use which are important. In other words, an abusive scheme is not saved merely because it is one way of achieving a legitimate aim. There can be no doubt, since both Mr Dudley and Mr Litchfield conceded it, that the essential (in truth, only) aim of the arrangements was to secure a tax advantage; the question therefore is whether they were abusive. As the Court indicated in Halifax, abuse will not be found unless there is an artificial scheme whose result is contrary to the purpose of the legislation. 
46.	It does not seem to me to be seriously arguable that an arrangement by which the customer may become an importer, by virtue of the sheer accident that an item he has ordered is out of stock when he orders it and remains out of stock (because no other customer has returned such an item) until the moment of supply, when he does not know, then or at any other time, that he has become an importer, is not artificial. Such an arrangement is quite different from any “normal commercial operation”, to adopt the phrase used by the ECJ in Halifax and quoted by Lord Neuberger. The scheme did not confer a benefit of any kind on the customer; he merely lent his name to an arrangement by which SML diminished its total tax burden. The reality, as in the similar case of Nissan Motor Manufacturing (UK) Ltd (2007, Decision C00236), is that the customer wanted a delivered item, and that is what, in truth, SML offered. The arrangements did not make it easier to achieve that objective, or add any value; they were nothing more than a tax-saving device.
47.	It is, moreover, impossible to discern any realistic commercial basis for SML’s incurring the additional cost, even if the task was largely accomplished by computer, of accounting for each item individually as it was removed from temporary storage, by comparison with the cost which would be incurred in the clearing of a complete consignment. No reason for doing so was suggested, beyond the obvious one that SML achieved a saving of duty and VAT. The different treatment of VAT-registered customers (who would want credit for the input tax they incurred, and would need to declare the import VAT on their own returns), though not of major importance in itself, nevertheless highlights the artificial structure of the scheme.
48.	I agree with Mrs Hall that the de minimis concession is an administrative or accounting concession. It is apparent not only from the placement within the Regulation of art 868 but also from its wording that it permits a customs authority to refrain from collecting small amounts of duty, but that it does not, as Mr Brown’s argument implies, exempt items of low value from duty—that is, the duty is due, whether or not it is collected in practice. I also do not accept Mr Brown’s argument that the VAT saving was no more than the natural consequence of the fact (assuming it have been a fact) that the sales were made before the goods entered the customs territory of the Community. In my view it is not possible to break down a scheme of this kind into component parts; it must be considered as a whole. Although the duty saving, alone, was significant, the scheme was clearly not designed with only that aim in mind, the VAT saving (which in the event was much greater than the duty saving) coming as a fortuitous bonus, and Mr Dudley did not suggest otherwise. He was well aware that if SML succeeded in selling the goods while they were still in temporary storage, there would be a saving of both duty and VAT, and I am in no doubt that the scheme was devised with both savings in mind.
49.	I agree with Mrs Hall that the scheme, if it succeeded, would confer on SML a benefit which is contrary to the purpose of the legislation, and with the reasons for that conclusion which she gave. I cannot usefully add anything to her arguments as I have set them out. In my judgment, therefore, this was an abusive scheme which, had it not failed for other reasons, would have to be struck down. I would, accordingly, dismiss the appeal on this ground as well.
50.	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.

COLIN BISHOPP
Tribunal Judge
Release Date: 22 April 2010