UK tribunal confirms difficulties in challenging excise duty assessments

Ian Robotham, tax expert at Pinsent Masons, said: “This recent decision confirms that it is quite difficult, but not impossible, for anyone facing an excise duty assessment to prove that there has been an earlier excise duty point. The elements required to challenge the assessment are complex and the evidential difficulties are plain. However, there is one valuable lifeline which taxpayers should be aware of and ought to seek to utilise, which is the opportunity to seek specific disclosure from HMRC regarding their investigation as to whether there is an earlier excise duty point which may result in another person/entity primarily liable for the excise duty in question. Comments in this decision may help taxpayers wishing to make such a request in future.”

This case concerned assessments for excise duty that were raised by HMRC on the operator of a storage facility, in relation to cigarettes, which were seized at the storage facility and on which excise duty had not been paid.

Under the UK regime (the Excise Duty (Holding, Movement and Duty Point) Regulations (HMDP Regulations)), excise duty is payable when excise goods, including cigarettes, are released for consumption in the UK. Excise goods are subject to UK excise duty when they are held outside duty suspension arrangements and UK excise duty has not previously been paid on those goods. The person liable for the duty is the person “holding” the goods at the time they are released for consumption.

There was no dispute in this case about who was holding the goods, and the tribunal followed earlier decisions which stated that HMRC must raise an assessment at “the earliest duty point that they can establish on the evidence they have.”

But the tribunal faced the problem, which has come up in several previous cases, of what to do when there obviously had been a point at which excise duty was due before the person who was holding the goods, but "where, when, how and by whom that event occurred cannot be established". The tribunal considered several points about the burden of proof that could have broader implications while deciding on this issue.

The taxpayer accepted, based on prior authority, that, since it was “holding” the goods, it must be the person assessed for excise duty unless an earlier excise point could be identified. It also accepted that the burden of proof of identifying that earlier excise point fell on the taxpayer and not on HMRC. This is based on the fundamental principle that a person bringing an appeal against an assessment must discharge the burden of showing that its grounds of appeal have been established.

Although it was accepted that there must have been an earlier duty point in this case because “over 2.3 million Mayfair Blue cigarettes do not turn up as a job lot in the Black Country by magic”, last year the Court of Appeal, in a case known as Dawson’s, had established that it is not sufficient simply to point to the chain of supply and argue that there must have been an earlier duty point.

However, the taxpayer here argued that, whilst the legal burden of proof was on it, there was a shift in the “evidential burden” to HMRC. The focus on the evidential burden derives from the fact that HMRC is, in most cases, the party which is likely to be in a much better position to access evidence on the issue and investigate other possible duty points.

“The tribunal, after reviewing the authorities, identified two circumstances in which the evidential burden can shift, despite the legal burden of proof remaining. The first is when the party with the burden of proof has sufficiently presented their case, prompting them to question, ‘what more can you expect from us?"’ Additionally, the burden of proof may shift when it lies with one party, but the evidence is exclusively or predominantly held by their opponent”.

The tribunal found that the taxpayer holds the burden of proving that HMRC did not hold evidence to establish an earlier duty point. The tribunal expressed this view “with some reluctance”, acknowledging that HMRC “holds all (or by far the better) cards” on this issue, that it would align with the overall excise duty policy, and it would not be difficult for HMRC to comply with. However, it considered that none of these could outweigh the clear statutory provision which puts the burden on the taxpayer.

The tribunal also found that the taxpayer bears the burden of proving an earlier duty point, again based on statutory construction. However, it noted that there are options for taxpayers to assist them in these matters. A possible option would be to seek a judicial review claim about HMRC's lack of investigation into earlier points of duty. Another would be to make a request for specific disclosure from HMRC under the Tribunal Procedure Rules. No such application had been made in this case, but counsel for HMRC conceded that “it was difficult to see circumstances in which a Tribunal would refuse an application for disclosure of evidence in HMRC’s possession that might help to establish an earlier duty point where it was properly made”.

Ian Robotham said: “Although no taxpayer wants to end up in this position, if they are faced with an excise duty assessment in circumstances where they are certain that there must be an earlier assessable duty point, taxpayers should keep in mind the option of requiring specific disclosure from HMRC. It is vitally important for taxpayers to understand what investigations, both the officer involved and HMRC on a wider basis, have conducted and to understand what evidence they have relied upon to reach the conclusion that they have established the earliest excise duty point that they can, and applications for specific disclosure might assist in this regard.  It may also assist in determining whether there are any further reasonable investigations that HMRC could make which might lead them to establish an earlier excise duty point.”

“We have met significant resistance to applications for specific disclosure from HMRC on this issue in the past which, when compelled to by the tribunal, has resulted in favourable outcomes for taxpayers, but the comments made in this decision may be helpful in persuading HMRC to be more forthcoming in future. This may in turn lead to earlier or more favourable resolution of disputes,” he said.