UK Supreme Court rules that longer time limits for customs duty demands should apply in criminal context

By Jack Prytherch

01-2020

In FMX Food Merchants v HMRC [2020] UKSC 1, the Supreme Court ruled in favour of HMRC, overturning last year's Court of Appeal decision, deciding that HMRC could issue a post-clearance demand after the expiry of the normal three-year time limit where criminal proceedings were relevant, despite the fact that UK law does not specifically provide for a longer time limit.

Background

Customs duty is levied on the import of goods into the EU (collected on behalf of the Commission by Member States). Once duty is paid on import, goods can be traded free from further duty within the EU under free movement of goods.

The amount of duty payable will depend on the type of goods being imported and their value, but also their place of origin – additional duty is payable where goods have originated from certain countries to protect the Single Market from, for example, goods being 'dumped' into the EU at substantially below their normal local value. Importers make declarations on import in order to calculate the amount of duty to be levied. Where a customs declaration is later found to be incorrect (whether deliberately or not), tax authorities can issue a "post-clearance demand" to require payment of any customs debt owed.

The issue before the Supreme Court concerned time limits for HMRC to issue post-clearance demands under the (now superseded) EU Customs Code (Regulation No. 2913/92) (the "Customs Code").

Article 221(3) of the Customs Code provides that post-clearance demands must be issued within three years from the date on which the customs debt was incurred (in most cases, the time of import). However, Article 221(4) clarifies that, where the debt arises from an act which is "liable to give rise to criminal court proceedings" (which we will refer to as the "criminal proceedings condition"), the demand may, "under the conditions set out in the provisions in force", be issued after the normal three-year period.

The facts

FMX imported ten consignments of garlic into the UK in 2003 and 2004, declaring that the goods came from Cambodia (which benefited from an exemption from import duties). In actual fact, the garlic was from China – a fact which only came to light in 2007 following an investigation by the European Anti-Fraud Office and which would have resulted in FMX originally paying around £500,000 in further duty.

In 2007, HMRC issued post-clearance demands for approximately £370,000 (i.e., within the normal three-year limit set out in Article 221). The First-tier Tribunal subsequently dismissed FMX's appeals against those demands in December 2010, holding that the imports had originated in China.

In March 2011, HMRC issued another post-clearance demand to FMX – just over three months following the First-tier Tribunal's decision but long after the normal three-year time limit set out in Article 221.

It was common ground in the case that the goods in question had originated in China, that the makers of the certificates of origin (which stated that the goods were from Cambodia) knew that they were false and would be used for the purposes of import declarations into the UK, and that FMX had presented these certificates to HMRC. Although FMX was not implicated in the underlying fraud, it had committed an act that was liable to give rise to criminal court proceedings under section 167(3) of the Customs and Excise Management Act 1979 (which creates a strict liability offence). It was therefore accepted that the criminal proceedings condition had been satisfied.

"Provisions in force"

The case before the Supreme Court concerned the meaning and effect of the short and rather innocent-sounding phrase in Article 221(4): "under the conditions set out in the provisions in force".

FMX's case was that Article 221(4) of the Customs Code confers an option on Member States to provide, in advance, an alternative fixed time limit in substitution for the general three-year limit where the criminal proceedings condition is satisfied. On that basis, if the Member State does not do so, the three-year limit must remain in force in order to not offend the EU principle of legal certainty. The Court of Appeal had already decided that UK law does not provide for an alternative time limit (in particular noting that the general time limits laid down by the Limitation Act 1980 are expressly disapplied in respect of taxes or duties).

HMRC, on the other hand, argued that the three-year limit should be automatically displaced wherever the criminal proceedings condition is satisfied. The requirement for legal certainty, they argued, may be met either by a Member State's provision for a substitute fixed time limit, or by the combination of a number of specific provisions of national law (which, together, satisfy such requirement) or, as a last resort, by the general requirement of EU law that the demand be issued within a reasonable time.

FMX won their initial appeal at the First-tier Tribunal, as well as their subsequent appeal at the Court of Appeal (the Upper Tribunal having decided in favour of HMRC).

The Supreme Court has now decided in favour of HMRC.

The Court held that the purpose of Article 221(4) is to preserve the integrity of the criminal process whilst leaving the conditions (including time limits) for issuing post-clearance demands to each Member State. The disapplication of the three-year limit is the automatic result of the likelihood of criminal court proceedings – in other words, it does not require a Member State to select a different time limit (which the UK had not) and so HMRC could issue a post-clearance demand after the expiry of the normal three-year limit where the criminal proceedings condition was met.

The Court made clear, however, that HMRC cannot issue demands without any time limit whatsoever, on the basis that this would be a breach of the fundamental principle of legal certainty in EU law. The majority decision rejected HMRC's contention that such a breach could be avoided by effectively disapplying the exclusion for taxes and duties in the Limitation Act 1980, determining that the principle of legal certainty under EU law would in any event require a demand to be issued within a reasonable time. On the facts of this case, the Court decided that it was reasonable for HMRC to delay issuing the later post-clearance demand until the litigation concerning the earlier demands had been settled.

Comment

This case concerned specific phrasing in the Customs Code, which has now been replaced by the Union Customs Code (Regulation No. 952/2013) (the "UCC"). Although the equivalent provision of the UCC (Article 103(2)) does not contain the same "provisions in force" phrasing, it is similar to Article 221(4) of the Customs Code, and both provisions contain the same criminal proceedings condition. The Court of Appeal had left an open question as to whether its decision in favour of FMX would have also applied in respect of the equivalent UCC provisions (whilst noting that FMX's arguments would have been less effective in those circumstances). The Supreme Court's decision did not specifically consider the UCC provisions, but its effect is likely to close the door left partially open by the Court of Appeal.

One issue that remains unclear is how the criminal proceedings condition interacts with the UK's civil evasion regime. The Finance Act 2003 provides for two types of civil penalties in relation to customs duty errors: a civil penalty for contraventions of customs rules; and a civil evasion penalty, the latter of which requires an element of dishonesty.

The civil evasion test of dishonesty is now the same as for criminal proceedings (following the Supreme Court decision in Ivey v Genting Casino (UK) Ltd t/a Crockfords [2017] UKSC 67), although the standard of proof for HMRC to show dishonesty is lower in a civil context (i.e., on the balance of probabilities rather than, as is the case for criminal matters, a jury or magistrate having to be sure that an offence has been committed).

The Supreme Court's decision mentioned in passing that the criminal proceedings condition does not require criminal court proceedings to actually ensue, referring to previous case law on that subject. It would seem arguable, at least, that a person who acts "dishonestly" for the purposes of civil evasion may also be caught by the criminal proceedings condition - potentially exposing taxpayers who have only committed civil errors to longer assessment time limits intended for criminal behaviour.

If you receive a post-clearance demand from HMRC that relates to imports outside the normal three-year period or receive a civil evasion penalty and would like to know more about how we can assist, please do contact us.