FRAUDULENT
EVASION OF DUTY
“in
the matter of Turnstem Ltd sub nom Harish Bhanderi v Customs & Excise Commissioners (2004) EWHC
1765 (Ch).
By
SALLY
RAMAGE
10th
February 2005
The Customs and Excise Management Act 1979 creates several overlapping offences of fraudulent evasion of duty, “duty” being VAT chargeable on the importation of goods, “goods” being as per the Value Added Tax Act 1994, section 16(1).
Fraudulent evasion of duty is punishable on conviction on indictment with seven years’ imprisonment or a penalty of any amount. It is possible to commit this offence by merely being “concerned in” the illegal activities referred to.
Mr Bhanderi was the director of Turnstem Ltd., a business trading in alcohol in bond.
Under Excise Duty Points(Duty suspended Movements of Excise Goods) Regulations 2001. Reg 7(2), in respect of alcohol which Turnstem Ltd acquired in bond in the UK to sell duty free abroad, HM Customs and Excise assessed an amount which the company owed to HMC&E. ( Excise Duty Points [Duty Suspended Movements of Excise Goods] Regulations 2001, reg 7(2) provided:
‘Any other person who causes or has caused the occurrence of an excise duty point as prescribed by regulation 3 or 4 above, shall be jointly and severally liable to pay the duty with the person specified on paragraph (1) above’.)
It was such a big bill that Mr Bhanderi allowed the company to become insolvent, perhaps thinking that the VAT bill would disappear. He must then have realised that HMC&E would be creditors and would still be paid, so he applied to the court to rescind the compulsory winding-up order and to dispute the VAT bill. The court decided not to rescind the winding up of the insolvent company just because Mr Bhanderi had changed his mind. It follows that since the company is wound up, the liquidator must challenge the VAT bill if there are grounds to do so, because he owes it to the other creditors to do so. If there are no grounds to challenge the VAT bill, it becomes another creditor with no special priority over other creditors. The liquidator would incur legal costs in challenging the VAT bill and these would amount to priority costs over other creditors, although the actual VAT is not a priority debt over other creditors.
The heavy might of HM Customs and Excise almost always wins as the offence of evasion of duty is punishable on conviction on indictment with seven years imprisonment or a penalty of any amount. The offence is wide in scope and it is possible to commit evasion of duty by merely being “concerned in” the illegal activities referred to. This phrase is sufficiently vague to cover not only acts done before the alcohol reaches the jurisdiction that makes it taxable , but dealings with the alcohol after this, although the prosecution must prove that this director intended to defraud HMC&E or knew that the company intended to defraud HMC&E.
Exactly the same facts came up in an earlier case, HMC&E v Jack Baars Wholesale and others, on 19th January 2004. The only differences were that the Jack Baars Wholesale was a partnership and Bhanderi’s was a limited company and the Jack Baars appeal was already pending whilst Bhanderi had not yet lodged an appeal. The judge in the Jack Baars case said that “the respondents raised a genuinely triable issue that amounted to a bone fide dispute on substantial grounds that went to the whole of the asserted debt”.
Yet a similar case was lost, Arena Corporation Limited (in Provisional Liquidation) v Commissioners of Customs and Excise Eu LR Vol 9 Issue 1 (January 2005). This time the case was argued around the point of whether Reg 7(2) was consistent with Council Directive 92/12/EEC and whether it was ultra vires the power to make regulations under Finance Act 1992, section 1(4). In this case the Arena company was ordered to be wound up on the basis of a debt due to Customs and Excise. Summary judgement was given against James Peter Schroeder who owned and controlled Arena Corporation Ltd. The issue was the movement of alcohol from two bonded warehouses in England to bonded warehouses in Italy and Belgium. Customs said that “excise duty points” had occurred and raised VAT. It was held that reg7(2) was not inconsistent with council Directive 92/12. It was member states that set chargeability conditions and defined the persons by whom VAT was payable. The member states have freedom to impose non-discriminatory internal taxation as permitted by Article 90 of the EC Treaty. Therefore the order to wind up was rightly made. These three similar and yet different cases illustrate the decisions made due to the nuances in facts of the cases.
END
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