Customs In Wonderland?

KEITH HOBSON and HARTLEY FOSTER of KLegal consider whether the Government's policy on tackling excise smuggling is about to disappear down a rabbit hole.

CUSTOMS NEWS RELEASE 72/02, entitled 'Crackdown on tobacco and alcohol smuggling continues', quoted John Healey, Economic Secretary to the Treasury, as saying, with regard to the recent decision of the High Court in R (on the application of Hoverspeed Ltd) v H M Customs and Excise [2002] EWHC 1630 (Admin) that: 'The court has backed the fundamentals of the United Kingdom's approach to tackling excise smuggling'. In fact, within the fiscal theme park, where factual and legal realities are suspended or inverted and in which Customs and Excise seem to operate, the United Kingdom's approach taken with regard to tackling excise smuggling is not draconian enough. The procedures adopted by Customs at the Dover Hoverport, which include 'intensification exercises', where Customs teams 'dressed like police tactical team(s), in dark uniforms, carrying police tool belts' herd a hundred or more passengers into lines and direct them to a six foot wide door with a Customs officer placed on either side, question all the passengers and search all their bags, and an almost automatic vehicle seizure policy, are, in this fantasy world, insufficient uses of Customs' wide discretionary powers. In fact, if the indication given by this news release is anything to go by, then Customs will no doubt interpret the Hoverspeed case as meaning that now they are entitled to seize all Hoverspeed boats arriving at Dover on the ground that there is likely to be at least one passenger on at least one vehicle on each boat carrying excise goods in excess of the 'minimum indicative level'.

However, for those of us who choose not to believe six impossible things before breakfast, then the decision in Hoverspeed can be seen as probably the final blow in a series of judicial 'attacks' on Customs' current approach to tackling excise smuggling. Moreover, it may require the United Kingdom Government to consider whether having rates of duty that are far higher than apply in most other European Community countries can be maintained in an internal market characterised by the abolition of obstacles to the free movement of goods.

This article analyses how the United Kingdom has attempted to implement the requirements of European Community law with regard to the free transportation of excise goods bought in other European Community countries. It then offers some comments on the consequence of the Hoverspeed judgment in respect of the policies and procedures adopted by Customs and Excise.

Relevant principles of European Community law

The foundations of the right to purchase and move goods around the Community can be traced back to the Treaty of Rome 1957. This treaty established the European Economic Community and provided by Article 2 that the Community should establish 'a common market and promote throughout the Community a harmonious development of economic activities'. Under Article 3, the various activities that the Community should carry out so as to achieve its purposes were set out. These included the creation of 'an internal market characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital'.

However, prior to 1 January 1993, private individuals were impeded from shopping for excise goods across borders because the charging of excise duties on excise goods imported from one Member State of the European Union to another was not contrary to Community law. Under the European Community Treaty, any fiscal charge is either customs duty or a charge having equivalent effect thereto or else it forms part of a general system of internal taxation. Excise duties on excise goods imported from one Member State to another were not categorised as customs duties upon imports or charges having equivalent effect (within the meaning of what was then Article 12 of the European Community Treaty), since they formed part of a system of taxation applied equally to goods manufactured within the territory of the particular Member State. Prior to 1993, what was required under the Treaty was merely, in broad terms, that such systems of internal taxation should not discriminate against goods imported from other Member States. Thus, the United Kingdom, for example, was permitted to charge excise duties on excise goods imported from other Member States (provided that this charging did not occur in a manner that was discriminatory), and importation of such goods amounted to a chargeable event, with the duty due at the border. Limited degrees of exemption from excise duty on imports were introduced over the period 1969 to 1993.

A more liberal law

However, the legal position changed completely on 1 January 1993 with the coming into force of Council Directive 92/12/EEC. This Directive was enacted pursuant to Article 99 of the European Community Treaty, which provides for the harmonisation of legislation relating to, inter alia, excise duties. It had the consequence of fundamentally 'liberalising' the rules with regard to the freedom of individuals to import excise goods, as the scheme of Directive 92/12/EEC is that the crossing of an internal frontier is no longer, in principle, a chargeable event for excise duty purposes. Article 6 provides that excise duty shall become chargeable on:

• manufacture;
• importation into the European Community; or
• holding for a commercial purpose within a Member State.

Under Article 8, excise duty shall be accounted for in the state of acquisition with regard to products acquired by private individuals for their own use.As the Court recognised in Hoverspeed, for 'true personal imports' the charging of excise duty at the frontier is simply abolished by the combined effect of Articles 6 and 8... 'the only excise duty payable on these goods is that which forms part of the price of the goods when they are bought by the individual in the first Member State and then transported to another Member State (usually his home state) by him for his own use'.

Article 9, which is parasitic on Article 8, creates a régime of chargeability when the second Member State can establish that the products referred to in Article 8 are intended for 'commercial' rather than 'own use' purposes. Thus, if goods are 'false personal imports', Member States are empowered to charge excise duties on such imports. However, there is no requirement that excise duty on false personal imports must be charged on importation, i.e. at the border. The chargeable event arises when the goods are held for a commercial purpose in the second state. Even though this may coincide with importation and it may be administratively convenient for the United Kingdom, for example, to identify (and charge excise duty on) false personal goods at the frontier, the recitals to the Directive make it clear that it is important that free movement is not impeded unreasonably by the creation of checkpoints at internal frontiers.

Article 9 sets out a checklist of factors that Member States must take into account when considering whether excise goods are being held for a commercial purpose. One of these factors is the quantity of the products; and with regard to this factor, 'Member States may lay down guide levels, solely as a form of evidence. These guide levels may not be lower than (for example)... cigarettes 800 items'.

Relevant UK legislation

In the United Kingdom, the system with regard to the charging of excise duties on the importation of excise goods remains fairly complex. Taking tobacco as an example, 'there shall be charged on tobacco products imported into... the United Kingdom a duty of excise' under section 2(1), Tobacco Products Duty Act 1979. Section 1(1), Finance (No 2) Act 1992 enables the Commissioners to make provision by regulations, in relation to any duties of excise on goods, for fixing the time when the requirement to pay any duty with which goods become chargeable is to take effect ('the excise duty point'); and Regulation 4 of the Excise Goods (Holding, Movement, Warehousing and REDS) Regulations SI 1992 No 3135 provides that the excise duty point in relation to goods imported into the United Kingdom from another Member State, which have been produced or are in free circulation in the European Economic Community, shall be the time when the goods are charged with duty at importation. Thus, if an individual enters the United Kingdom with, for example, tobacco that he has purchased for his own personal use (on which duty has been paid elsewhere in the Community), excise duty is prima facie chargeable.

However, these rules are subject to the Excise Duties (Personal Reliefs) Order (SI 1992 No 3155), which transposes the requirements of the Directive into English law. Under Article 3 of this Order, anyone entering the United Kingdom from another Member State 'shall be relieved from payment of any duty of excise on excise goods which he has obtained for his own use', provided that duty has been paid in the local place of purchase. Article 5 provides that the reliefs are subject to the condition that the excise goods are not held or used for a commercial purpose and that if this condition is not complied with then the goods shall be liable to forfeiture. Under Article 5(3A) (which was inserted in 1999), Customs may require a person who has in his possession any excise goods in excess of the minimum indicative levels 'to satisfy them that the excise goods afforded relief under this Order are not being held or used for a commercial purpose'; and under Article 5(3B) 'Where a person fails to satisfy the Commissioners that the excise goods in question are not being held or used for a commercial purpose' then the goods shall be liable to forfeiture. The Customs officer, when satisfying himself as to whether the goods are held for a commercial purpose, has to take into account the factors listed in Article 5(2). These include his reasons for having possession or control of those goods, his conduct in relation to those goods, the nature of those goods including the nature and condition of any package or container, as well as the quantity of those goods.

The Hoverspeed decision

It can be seen that the way that the United Kingdom system of excise duty operates means that it is dependent on the Excise Duties (Personal Reliefs) Order correctly reflecting the aims and spirit of the Directive and correctly importing the principles of the Directive for its compatibility with this country's obligations under European Community law. In the United Kingdom, duty is prima facie chargeable on excise goods imported from other Member States on which duty has been paid in that other Member State, unless relief is provided by the Order; and so, for compatibility with European Community law, the Order must provide relief in the same way as the Directive does. However, it does not do so and fails in two important respects. First, it does not recognise that European Union nationals have a Community law right to carry excise goods that they have purchased for their own purpose in a Member State throughout the European Union without restriction. As Lord Justice Brooke said, at paragraphs 169 to 170:

'In the present context, European Union nationals have a right to carry with them duty free into this country excise goods such as alcohol and tobacco which they have bought in another Member State for their own use. One would expect to see that our national law recognised that right in the Excise Duties (Personal Reliefs) Order and that it correctly imported into the Excise Duties (Personal Reliefs) Order the principle that such goods are only not to be treated as being imported for the travellers' own use if the state can show that they are in fact holding them for a commercial purpose.

'Nobody reading Article 5 of the Excise Duties (Personal Reliefs) Order could, in our judgment, have a clear and precise understanding that these are their rights. The Excise Duties (Personal Reliefs) Order does not, as the Directive requires, abolish the imposition of excise duty on imports at the internal frontier (save for cases concerned by Articles 7, 9 and 10 in so far as such duty is chargeable on goods held for a commercial purpose within the state).'

The second failure is that the Order imposes on the citizen the burden of establishing that he is not holding the goods for a commercial purpose, and this is a burden expressly not imposed by the directive. The Court agreed with the contention of Hoverspeed:

'The presumption contained in Article 5(3B) of the Excise Duties (Personal Reliefs) Order in respect of goods held in excess of minimum indicative levels does not treat such excess "solely as a form of evidence" and is incompatible with Article 9(2) of the Excise Directive and Article 28 of the European Community Treaty (at paragraph 172).'

Proof and evidence

It is clear that Article 9 does not impose a burden of proof on the holder of excise goods in excess of the guide levels. It specifically states that Member States may lay down guide levels, 'solely as a form of evidence'. Moreover, it indicates that there are a number of factors to be taken into consideration, rather than just the quantity of the goods. With regard to the system of excise duty in the United Kingdom, the Court observed:

'It seems to us that the mindset of those who were responsible for determining (Customs') policies has not embraced the world of an internal market where excise goods can move freely across internal frontiers, subject only to checks made when there are reasonable grounds for suspecting that an individual traveller holds alcohol or tobacco for a commercial purpose, and not for his own use.'

The other main conclusions of the High Court were as follows (with the authors' interpolations in brackets).

Commercial purposes

Excise duty is only chargeable upon excise goods purchased by an individual in another Member State of the European Union when they are held in this country for commercial purposes, as opposed to being held by the individual for his own use. (The direct effect of the Directive is that individuals have a primary European Community law right to bring excise goods into the United Kingdom for their own use without payment of excise duty. It is clear from the Directive that chargeability is commercial purpose, rather than entry. It thus follows, as the Court recognised, that the only justification for stopping at border is administrative convenience only.)

Arousing suspicion

There must be reasonable grounds for suspecting an individual of holding goods bought in another Member State for commercial purposes before he lawfully may be stopped and searched. (The only power available that enables Customs officers to stop and search individuals with regard to securing the collection of national excise duty arises under sections 163 and 163A, Customs and Excise Management Act 1979. The exercise of these powers requires the existence of reasonable grounds to suspect (respectively) that a particular vehicle is carrying goods which are chargeable with any duty that has not been paid or a particular individual has with him alcoholic liquor or tobacco chargeable to excise duty. Moreover, as the Court said, at paragraph 180, 'The powers they use at a frontier must be the same powers as they would use anywhere else within the state for the purpose of ensuring that duty is paid on excise goods chargeable within that territory'.)

Outward checks

In an unusual development, as reported by the Daily Telegraph on 16 August 2002, in an article entitled 'Customs switch tactics to random outward checks', Customs, it seems, have now resorted to checking travellers on the way out to the Continent. The report states that 'travellers are asked if they are going shopping, how much money they have with them, when they are returning, and even to give their credit card limits. Some travellers reported that they refused to answer and demanded to know why officers were investigating someone leaving the country. In most cases, the Customs officers retreated rather than provide requested formal identification'.

Although it could be argued that this procedure may give rise to individualised reasons for stopping individuals on their return to the United Kingdom, the authors have found it difficult to identify the particular source of power that enables Customs officers to impede citizens' free movements on crossing the internal frontier to, for example, France or Belgium.

Reactions

One of the most interesting questions that arises from this decision is 'what happens next?'.

Leaving aside the issue of an appeal by Customs, it is possible that the reaction of the United Kingdom Government to this decision may provoke the European Commission to take action. Indeed, Fritz Bolkenstein, the Commissioner for the Internal Market and Taxation, has already issued a 'letter of formal notice' to the United Kingdom Government in response to complaints by other travellers returning to this country from mainland Europe. It is not known by the authors how the Government chose to respond to this. However, the response of the Economic Secretary to the Treasury to the Hoverspeed decision suggests that the Government may be loath to change our system of excise duty collection.

When Denmark and Finland joined the European Union, they were authorised to continue to apply their existing restrictions on the quantity of those excise goods able to be brought into each country free of additional duty. These restrictions included that the duty relief was only granted to those travellers who had been out of the country for more than 24 hours, so precluding 'booze cruises'. Similarly, when Sweden joined the European Union, the restriction on the quantity of excise goods able to be imported by the traveller remained in place.

However, when these countries found to their cost that their high rates of excise duty led to cross-border shopping and smuggling, they reduced excise duty rates in respect of wines and spirits. Quentin Rappoport, Director of the Wine and Spirit Association comments 'other high duty countries have already responded to the pressure of cross border shopping; Switzerland has seen tax revenues rise higher than before its duty rates were halved in 1999; Norway has cut excise tax on spirits by 15 per cent and wine and beer by 5 per cent; Sweden has reduced duty on wine by 19 per cent due to the pressure of cross border shopping from Denmark'. There seems to be no reason in principle, why such revenue benefits should not apply to the United Kingdom if it cut its rate of excise duty.

However, whether or not the Government and Customs and Excise will accept this argument remains an unanswered question. If they choose to do so, then the role of Customs officers in the brave new world of the internal market is unlikely to be one that allows them to dress up in police 'SWAT' team uniforms and question passengers both on the way out and on the way back from the Continent.

Keith Hobson is a Customs' lawyer and Hartley Foster is a specialist in human rights and tax law. Both are barristers in the tax litigation department at KLegal.

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