Last Orders! The Alcohol Wholesalers Registration Scheme and Trading Pending Appeal

1. Yesterday the Supreme Court ended a debate that has seen dozens of stays imposed by the First-tier Tribunal (Tax Chamber) (“FTT”) and a series of cases before the Administrative Court.
2. Lady Black (with whom Lord Reed, Lord Sumption and Lord Briggs agreed) gave the judgment in OWD Ltd trading as Birmingham Cash and Carry (In Liquidation) and Anor -v- HMRC [2019] UKSC 30 answering three questions:

• What powers do HMRC have under section 88C of the Alcoholic Liquor Duties Act 1979 (“ALDA”) to permit trading pending the determination of an appeal to the FTT?

• Can HMRC give temporary approval pending appeal under section 9 of the Commissioners for Revenue and Customs Act 2005 (“CRCA”)?

• If HMRC either do not have the power to permit trading pending the determination of an appeal to the FTT, or have power but decline to exercise it, what interim relief, if any, can the High Court grant to ensure that any appeal to the FTT is not thwarted by the wholesaler going out of business whilst awaiting the determination?

3. The background to this dispute is as follows:

• HMRC introduced a scheme whereby wholesalers supplying duty-paid alcohol had to be approved, the test being a trader needed to be considered “Fit and Proper” by HMRC. This approvals process was considered necessary to combat a fraud in the alcohol supply business sector.
• If a wholesaler was considered “Fit and Proper” approval would be given to them, and the wholesaler’s name entered onto an HMRC register. This register could then be checked by other wholesalers to ensure bona fides prior to engaging in business.
• The Appellant wholesalers in this case were denied the approval on the basis that they were not considered ‘fit and proper’.
• They each sought an injunction requiring them to be registered whilst their appeals to the FTT were determined.
• These were refused, but it was suggested by the Court of Appeal that there was power within s88C of ALDA to provide temporary registration.

Question 1 – Section 88C Powers

4. Lady Black summarised HMRC’s argument as follows:

“36. It is necessary to appreciate exactly how HMRC put their criticism of the Court of Appeal. The following passage from their written case goes to the heart of the argument:

“It is therefore submitted that HMRC could not properly conclude someone was not fit and proper ‘to carry on the controlled activity’ (even on conditions which include the power to approve for a limited time only); yet then separately conclude in response to a request that the same business and leadership might be fit and proper to carry on the controlled activity pending appeal to the FTT against the first finding …” (Emphasis in the original)

From this, it is clear that HMRC’s argument is addressed to a situation in which they have already concluded that someone is not fit and proper even for a limited period, and whatever conditions might be imposed. In their submission, the introduction of an extraneous factor which has nothing to do with fitness and propriety (ie: the fact that an appeal is pending) cannot alter this assessment of fitness.”

 “38. If HMRC were advancing the “thesis” there set out, it would be an untenable one, in my view. But as I have said, they are not doing so. They are not insisting that absolute fitness and propriety is required in all cases, but addressing the situation where, as here, they have concluded that no conditions or limitations will enable them to be satisfied that the person is fit and proper. … On the facts of these appeals, HMRC had nevertheless concluded that the wholesalers were not fit and proper. I would accept their argument that in those circumstances there is no power to grant temporary approval pending appeal. If the person is not fit and proper for even a limited period of time, that holds good whatever purpose the time limited approval would be designed to achieve. If considerations of hardship and the impact that maintaining the decision would have on the efficacy of the appeal were relevant to HMRC’s decision, it might be different. But I am satisfied that the Court of Appeal was right to conclude that such considerations are not to the point. Section 88C operates through the medium of HMRC being “satisfied that the person is a fit and proper person to carry on the activity”, and the impact upon the person, or his business, of a refusal of approval is not material to that evaluation.”

Question 2 – Temporary approval pursuant to s9 of CRCA

5. Having found that there was no power within s88C of ALDA to grant temporary approval to a trader whilst its appeal worked its way through the FTT, the Court turned to whether there was power under s9

6. Lady Black summarised s9 of the CRCA at paragraph 45 as follows:

“45. Section 9 concerns ancillary powers which are necessary or expedient in connection with the Commissioners’ exercise of their functions, or incidental or conducive to that exercise, not ancillary powers which undermine or contradict those functions. I do not accept that recourse can be had to it to provide an alternative route to time limited approval, supplementing section 88C in the way that the wholesalers suggest. I say that not only because of the terms of section 88C itself, which permit authorisation only under that section (“approval given by the Commissioners under this section”), but also because of the attributes of the whole scheme of which section 88C forms part. Rather than assisting the Commissioners’ exercise of their functions under the scheme, such a use would, in my view, undermine the scheme.”

7. The Court held that where HMRC have concluded that a trader is not “Fit and Proper” it could hardly then go on to find that it would be necessary or expedient to exercise an ancillary functions power to permit something that the legislation expressly prevents:

“… it can similarly be said here that section 9 should not be construed as conferring on HMRC a power to grant temporary approval pending appeal which Parliament could have conferred through Part 6A or the FA 1994, but did not. That temporary approval pending appeal is not part of the scheme is perhaps underlined also by the fact that express provision was made in section 54(12) of the Finance Act 2015 for the time from which the prohibition on trading in section 88C was to apply, namely when the wholesaler’s application to HMRC was “disposed of” (i.e. by section 54(13), has been determined by HMRC, withdrawn, abandoned, or otherwise ceases to have effect), rather than from the conclusion of any appeal against the decision on the application.”

Question 3 – Injunctive relief in the High Court

8. The Supreme Court was troubled by the submissions on this issue by both the taxpayer and HMRC. It decided in light of the agreed position that it should not give a “definitive pronouncement” on the issue. The concern appears to have been founded in the principle that a person cannot be injuncted to do something that is not within their power to do.

9. The Supreme Court considered the decision of CC&C Ltd -v- Revenue and Customs Commissioners [2015] 1 WLR 4023. In that case Underhill LJ found that injunctive relief could be provided to a trader, in similar circumstances to those in the appeal, but only in extremely limited circumstances (i.e. where HMRC had acted “capriciously, outrageously or in bad faith”).

10. The difficulty that the Supreme Court wrestled with was the question of what power the High Court might have to issue a mandatory injunction to compel HMRC to do something that it had no power to do – because it was satisfied that a trader was not “Fit and Proper” to hold the approval.

11. Similarly concerned with this issue was Lord Hughes who gave a separate judgment with which Lord Sumption agreed. It was Lord Hughes’ view that there was a potential incompatibility with the ECHR; if a trader could not obtain injunctive relief and there was no power for interim or temporary registration pending an appeal, it may result in a company with a good case on appeal being put out of business. He suggested that this might require urgent consideration by Parliament.

Discussion

12. Those whose cases were stayed pending this decision are likely to register dismay. They have effectively been told that a scheme has been introduced for which there is no safety valve in case HMRC get it wrong; a trader’s business may be ruined simply because a decision, which is not accepted and has been challenged, cannot be brought quickly enough before the FTT.

13. The decision will have a dramatic impact on all those cases stayed before the Tribunal. It is at least arguable that the injunctions granted to all of them whilst the Supreme Court decided this case have been given on an unlawful basis. If that is right, HMRC will have to give serious consideration to immediately applying to set them aside so as not to be seen to be permitting traders to retain an approval via an unlawful injunction.

14. However, this will have a serious impact on the FTT’s order of business. If injunctions cannot be granted, and there is no ability to grant a temporary approval, the only presently available answer will be to seek expedition from the FTT. Quite how the busy Tribunals service will cope with a wave of requests from traders for expedited hearings remains to be seen.

15. The Supreme Court suggested that the answer lay with the legislature, who may need to act quickly to create the safety valve needed to ensure that the legislation remains ECHR compliant, to prevent wholesaler businesses from disappearing, and to avoid an already overburdened and under-resourced FTT from bearing the brunt of the decision.

About the Authors

An indirect tax evasion specialist, Leon Kazakos advises and represents individuals and companies who wish to appeal the decisions of HMRC to withhold input tax or to assess duty claims. He appears before the First and Upper Tier tax Tribunals in cases where financial misconduct (often but not exclusively MTIC fraud) is alleged by HMRC. He brings his significant experience in defending in the criminal courts in tax and duty fraud to these cases along with a full understanding of the significant body of case law that has developed in this area.

Joshua Carey has spent considerable time working for Her Majesty’s Revenue and Customs (HMRC) in the VAT Litigation Team. Joshua has gained experience appearing in the First-tier Tribunal (Tax Chamber) on a variety of issues and was the lead lawyer for HMRC in London in respect of a significant number of Missing Trader Intra-Community Tax (MTIC) cases. He accepts instructions from both taxpayers and HMRC in all areas of tax litigation.