EXCISE DUTY – Restoration – Commercial vehicle – Lorry and trailer used for attempted illicit importation of cigarettes – Enterprise of dishonest driver – Appellant owner unaware – Appellant had not obtained references for driver – Appellant’s standards of care apparently high in other respects – Restoration offered for fee equal to trade value of lorry and trailer – Application of Commissioners’ restoration policy for commercial vehicles – Whether decision based on policy produces disproportionate result – Yes – Appeal allowed 

LONDON TRIBUNAL CENTRE

	H & S HANDEL UND TRANSPORT GMBH	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC   (Chairman)
						ELIZABETH MACLEOD  
					 	SANDI O’NEILL

Sitting in public in London on 4 March 2004

Valentina Sloane, counsel, instructed by Pritchard Englefield, solicitors, for the Appellant 

D Manknell, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	H&S Handel und Transport GmbH of Leonburg, Germany (“H&S”) appeals against a disputed decision under which the Commissioners notified H&S that on review they upheld the decision to offer restoration of a Volvo vehicle and trailer on payment of a restoration fee of £35,000.

The facts

2.	The vehicle and trailer had been intercepted at about 1.30am on 25 April 2003 at Dover, East Docks.  The same day the vehicle and trailer were seized as liable to forfeiture under section 141 of Customs and Excise Management Act 1979.  They were liable to forfeiture as being a vehicle used for carrying some other things liable to forfeiture, namely 1,468,600 cigarettes not included in the documentation.  The cigarettes had been found concealed amongst a legitimate consignment of aluminium ladders.  The revenue on the seized goods was a duty of £261,000.  

3.	H&S is a haulage company.  It employs some 30 drivers and operates 30 heavy goods vehicles.  Each week H&S makes about 50 round trips between England and Germany.  

4.	The driver of the lorry and trailer seized on 25 April, a Mr Steffen Knoblich, had been employed since 25 March of the same year.  No reference from a previous employer had been obtained.  When asked by the Commissioners to provide evidence of such a reference, H&S explained – “It is a little difficult to provide a reference of his last place of employment as they are bankrupt”.  H&S had given Mr Knoblich their “Instructions to Drivers” and had entered into an employment contract with him.  The Instructions to Drivers give explicit instructions that the driver is to lock and seal the trailer after the final loading of the consignment has been completed and not to unlock it until the final destination; he is to return the seal or seals intact to H&S on return.  The driver is told to avoid contact with strangers along the transit route.  Those are examples of a much wider range of instructions.  Infringements of the regulations, the Instructions say, will incur severe penalties which could take the form of dismissal and might result in a report to the Public Prosecutor’s Office.  The employment contract directs Mr Knoblich, as employee, not to “use the vehicle … for trips he has not been instructed to make or for trips in his personal interest”; and it makes him responsible for observing Customs and border formalities.  H&S provides its drivers with specific directions as to the security of their loads and as to the steps designed to prevent carriage of illegal immigrants.

5.	Following the interception of the lorry and trailer, Mr Knoblich was arrested, interviewed and then “un-arrested”.  Mr Knoblich then disappeared, taking with him H&S’s mobile phone and its fuel and other credit cards.  H&S notified “Intel” and has commenced court proceedings in Germany against him.  

6.	The Commissioners accept that H&S had no prior knowledge or involvement in the smuggling attempt made by Mr Knoblich and resulting in the seizure of the lorry and trailer on 25 April 2003.

7.	On 25 April 2003 H&S requested restoration of the lorry and trailer.  The Commissioners responded on 29 April asking for details of, among other things, Mr Knoblich’s contract of employment, statements showing that sanctions for smuggling included “dismissal or other strong sanctions”, employment references and evidence that H&S had made enquiries of Mr Knoblich’s previous employer. The details provided by H&S are summarized above.  

8.	The decision to restore was given by letter of 10 June 2003 stating that the lorry and trailer “on this occasion can be restored to you for £35,000”.  H&S asked for a review.  The review decision upholding that decision was issued in a letter of 8 July 2003.  

The review letter

9.	The decision under review fell to be taken under section 152(b) which provides that the Commissioners may as they see fit, restore, subject to such conditions, if any, as they think proper, any thing forfeited or seized.  

10.	The review letter written by Mr Bernard Wills, the review officer who also gave evidence, states in full the “Restoration Policy for Freight Vehicles”.  As this was the subject of close scrutiny in the present appeal, we also set it out in full:

“Restoration policy for Freight Vehicles

The Commissioners’ policy concerning the restoration of heavy goods vehicles is designed to rigorously tackle the huge problem in the UK of cross-border smuggling and to significantly disrupt the supply of excise goods to the illicit market.  The current policy has been effective since 16 July 2001, and directs that:

(I)	Where the Commissioners cannot be satisfied that the driver or haulier are not knowingly involved in smuggling excise goods and the revenue is significant, on the first detection the vehicle may be seized and not restored.

In other cases where the Commissioners cannot be satisfied that the driver or haulier are not knowingly involved in smuggling excise goods, on the first detection the vehicle may be seized and restoration offered for a fee equal to 100% of the revenue involved or the trade value of the vehicle; whichever is lower.  On the second occasion, the vehicle may be seized and not restored.

(II)	Where the Commissioners are not satisfied that the driver or haulier has carried out what the Customs consider to be basic reasonable checks, which would have identified the illicit load: 

(A)	On the first occasion the vehicle may be seized and restoration offered for a fee equal to 20% of the revenue involved or the trade value of the vehicle, whichever is lower.

(B)	On the second detection, the vehicle may be seized and not restored.

(III)	Where the Commissioners are satisfied that the driver and haulier have taken all reasonable steps to ensure the legitimacy of the load, the vehicle may be seized and restored free of charge.

	Any exceptional circumstances, that may warrant a variation of the Commissioners’ policy will, of course, be taken into account.”

11.	The letter states that because “your driver” had been involved in the attempted illicit importation, the Commissioners would be justified in not returning the vehicle; but it continues by saying – “This penalty has not been awarded in view of the Commissioners’ acceptance that you had no hand in those activities.”  Instead, the letter says, the fee had been calculated under paragraph 2(A) of the policy and set at 20% of the revenue value capped by the actual value of the vehicle and trailer.  The “actual value”, Mr Wills explained in evidence was the “trade value” taken from Glass’s Guide as distinct from the replacement cost.  This, the letter says – 

“… was, in fact, a considerable relaxation of the policy, as paragraph 2(b) was more appropriate in view of the earlier seizure, on 27 January 2003, when Leonide Valentinovice Prosuzih was complicit”.

(We will deal with that feature of the case later.)

12.	The review letter then identifies ten matters taken into account, by the review officer.  These included the admission of Mr Knoblich that he had loaded the cigarettes in Belgium without the authority of H&S, the instructions given by H&S requiring drivers to observe Customs’ border formalities, H&S’s dismissal and prosecution of Mr Knoblich and “the fact that smuggled goods had recently been detected in one of your vehicles (27 January 2003) when you were warned and the vehicle returned free of charge”.  The letter then observes that H&S had failed to obtain a reference for Mr Knoblich.  The relevant passage of the letter reads –

“The fact remains, however, that without references, and with only five weeks’ experience in which to judge his reliability, he found that he had been put into a position where he had, and took, a golden opportunity to commit the act from which you have suffered, and which the Commissioners believe could have been avoided.”

The positions taken by the parties

13.	H&S, through Valentina Sloane, contends that the review decision is one which the Commissioners “could not reasonably have arrived at” within the meaning of that expression in Finance Act 1994 section 16(4).  The refusal to restore save on payment of a fee of £35,000 is disproportionate and not in accordance with H&S’s rights under Article 1 of the First Protocol to the Convention on Human Rights having regard to the lack of complicity on its part and the reasonable steps taken by it to prevent smuggling.  No “fine” should therefore have been imposed; alternatively a far lesser sanction should have been imposed.  Specifically it was said of the ground (taken into account by the review officer for concluding that H&S had not taken reasonable steps to prevent the smuggling) that smuggled goods had been detected in one of its vehicles in January 2003, that this did not of itself establish persistent carelessness on H&S’s part.  In that respect the review officer had wrongly assumed that culpability was proved by reason of the two smuggling attempts.  He had not properly taken into account the steps actually taken by H&S and accepted as having being taken to prevent smuggling.  Moreover he had ignored the previous blameless record of H&S covering several thousand trips through and from England.  Of the Commissioners’ reliance on the absence of a reference for Mr Knoblich, H&S questioned how the presence or absence of a reference “would have identified the illicit load” (see the words of paragraph 2 of the Policy) bearing in mind the measures put in place by H&S to prevent fraud and the contractual obligations imposed on Mr Knoblich under his employment agreement.  H&S, it was pointed out, knew nothing of the illicit consignment of cigarettes, of their source and of their destination; Mr Knoblich had been prepared to commit the fraud and lose his job and because it was done without any reference to H&S they were powerless to prevent it.  In any event, it was said for H&S, the bankruptcy of Mr Knoblich’s previous employer had made the provision of a reference difficult.

14.	H&S then argued that the scale of the penalty was arbitrary and disproportionate.  The amount sought in return for restoration, the trade price of the vehicle, was not far different from the cost of replacing the vehicle and came close to forfeiture of the vehicle.  Then it was argued that the fee was fixed by reference to a formula which bore no relation to H&S’s culpability and which produced an amount the sheer scale of which was disproportionate to the circumstances in the case.

15.	The Commissioners adduced evidence as to the reasonableness of the policy from Timothy Morris of their Law Enforcement Policy Department. The policy results from the scale of smuggled excise goods being brought into the UK. By 2000 over £1.5 billion in revenue had been lost through cross-channel smuggling. Through the rigorous approach adopted by the Commissioners, that figure had been reduced to £290 million by 2002.  Relevant to the policy is the fact that heavy goods vehicles have the potential to import large amounts of contraband and a stringent seizure action on heavy vehicles that transport illicit cigarettes and alcohol particularly hits criminal organizations.  The policy adopted is, say the Commissioners, not just reasonable, it allows for departures from it in exceptional circumstances. The fee imposed was, they say, in accordance with the Commissioners’ policy; they were entitled to formulate that policy and to require the officers to follow it.  They emphasized that any haulage operator employing a driver without obtaining a reference would be negligent.  And, they say, the previous instance of smuggling by an employee of H&S shows that the systems put in place by H&S were not adequate.

Conclusions

16.	Before examining the circumstances of the present case, we address the critical question, which is whether the policy adopted by the Commissioners is reasonable and represents a proportionate response to the haulier’s infringement.

17.	Take the case where the haulier has had no involvement whatever in the attempted illicit importation and has taken all the steps available to him to prevent it happening and assume it is wholly the dishonest driver’s enterprise. Paragraph I of the policy statement provides that “on first detection the vehicle may be seized and not restored”. What is it that makes total confiscation of vehicle and trailer from the 100% honest haulier an appropriate and proportionate response to the driver’s infringement?  The answer does not lie in vicarious liability.  That is a principle of the law of tort which makes a master liable to third parties for the wrongs of his servant. It has no place as a relevant circumstance to be taken into account in reaching the decision as to restoration under section 152(b). Magyar-UT Trans KFT (2003) Ex Dec 565. The answer may lie in corporate responsibility. But that doctrine imputes dishonesty to the haulage company where its “management” have acted dishonestly. Where for example a manager of a company’s haulage operations has responsibility for the acts of the drivers and that manager is involved in a smuggling fraud, the company may have to assume corporate responsibility for his acts.  The recent tribunal decision in W J Transport and Logistiks GmbH, (2004) Ex Dec 634 is an example of this.  Mr Manknell for the Commissioners in the present appeal relied heavily on that case. The circumstances of that case are superficially similar to the present case save that a Mr Fritz, the transport manager, was complicit in the attempted illicit importation of over 4 million cigarettes. Mr Fritz had, the Commissioners alleged and the Tribunal recognized, taken on responsibility for authenticating work orders, completing and checking paperwork, checking and obtaining drivers’ references, location checks of vehicles and drivers.  The Tribunal, in paragraph 66, said of Mr Fritz and his activities that these were “part of the company itself”; his activities were, as the Tribunal acknowledged in paragraph 66 “attributable to the company”. On that basis the Tribunal upheld the review officer’s decision to allow restoration on payment of a fee of £35,400 (being the Glass’s Guide value of that vehicle).

18.	The present is not, however, a case where anyone playing a part in the management of H&S’s haulage operations is said to have participated in the attempted illicit importation of the 1.4 million cigarettes. That brings paragraph II of the Restoration Policy into play. How, on a strict reading, does paragraph II apply? Assume for a moment that the haulier has failed in one respect to carry out “what the Customs consider to be basic reasonable checks which would have identified the illicit load”; on this assumption, let us say, he has been “80% careful” on the Customs’ scale.  The fee to be charged for restoration is to be calculated by reference to the formula; and if there has been a previous detection, the vehicle may not be restored at all.  The wording of the formula produces a result that bears no relation to the culpability of the haulier.  The same formula applies with the same result whether the haulier has been totally reckless (like Mr Crilly in Eugene Crilly (2003) Ex Dec 452, who allowed someone he had never met before at a location he had difficulty in remembering to swap his trailer for a different one loaded with contraband) or 80% careful.  Another way in which the policy produces an arbitrary result was pointed out by Gordon Coutts QC in A J Anderson (2003) Ex Dec 442:

“Further the Commissioners’ policy does not, it appears, properly allow for any measure of discretion as to a restoration fee.  In the present case the amount involved was 15kg of tobacco.  Had it been 50kg of tobacco the position of the Respondent would have been that a much larger sum would have been required.  But in the circumstances of this case any fault or admission on the part of the Appellant would have been precisely the same.”

19.	In effect, it seems to us, the policy can and in many cases will operate in a disproportionate way by producing an arbitrary figure that bears no relation to the care or carelessness of the haulier in question.  We turn now to the circumstances of the present case. 

20.	H&S employed Mr Knoblich without a reference.  That a reference was unobtainable because of the bankruptcy of his previous employer is, we think, beside the point.  The absence of references exposed H&S, to a greater degree than if good references had been obtained, to the risk of Mr Knoblich using the vehicle for smuggling. They were putting a £35,000 vehicle, and a significant potential revenue loss, into the hands of a recently hired driver on whom they appeared to have done no real checks. We think that H&S’s employment of Mr Knoblich in those circumstances made them blameworthy to an extent.  Whether there were any other means by which H&S could have assessed Mr Knoblich’s reliability, we do not, in the absence of any direct evidence from H&S, know.  As far as we are aware most if not all of H&S’s haulage work is on the Germany/UK route; consequently his reliability could not have been assessed by getting him to drive on less sensitive routes.

21.	We are not satisfied that the earlier smuggling attempt is relevant to the question of how the exercise of the discretion to restore the vehicle should be conducted.  We know nothing about the circumstances of that attempt except that it happened.  The review letter states nothing about those circumstances.  We know that H&S have been enforcing their internal rules to prevent smuggling etc. and we are satisfied that those rules more than qualify as “basic reasonable checks”.  There is a limit to what an international haulier can do to stop cross-border infractions by dishonest and determined drivers.

22.	We agree with H&S that a £35,000 penalty appears manifestly disproportionate to the circumstances of the case.  A challenge to the decision on proportionality grounds, however, has to confront the question of how a more proportionate and less invasive result should be achieved.  At this stage it is relevant to mention a difference of emphasis in the evidence of Mr Timothy Morris, the administrator with responsibility for export policy, on the one hand, and that of Mr Bernard Wills, the review officer on the other.  The policy introduced in July 2001 had, Mr Morris pointed out, been introduced as guidelines for the Customs officers.  They are however allowed an absolute freedom and in each case the discretion given to the officer is unfettered.  For example, instead of allowing restoration in return for 20% of the revenue involved (applying paragraph II(A)), the officer might if he thought fit increase that amount to 50%. This, latitude, he accepted, was before taking into account any exceptional circumstances. Mr Wills saw the one shortcoming in the present case, namely H&S’s failure to obtain a reference, as triggering the application of the formula without regard to the other precautions put in place by H&S.  Uniformity of approach among all officers was required; hence he said it was better to rely on the words of the policy rather than to leave it to the individual officer.  

23.	In common with Mr Morris we think a significant measure of discretion should be recognized by the officers responsible for the decision. There is, we recognize, a compelling need for a rigorous regime to prevent loss of revenue to the Exchequer.  The regime causes disruption and loss of business revenue to the haulier through the act of seizure which “sterilizes” the vehicle as a business asset. That disruption and loss will continue until the terms of restoration are determined. The act of seizure cannot be criticized on that ground.  At the same time the conscientious and compliant haulier needs to be recognized as such when the power to restore comes to be exercised. Credit must be given for his efforts to maintain a contraband-proof system and so to assist the Commissioners.  If he has put in place four out of five of the “basic reasonable checks” considered by the Commissioners to be necessary to enable him to identify illicit loads, this should, as a matter of policy and not as an exceptional circumstance, be taken into account as a mitigating feature in determining the fee to be charged in return for restoration.  

24.	The restoration policy (set out in paragraph 10 above) has caused difficulties in cases before this Tribunal because of the failure of the policy to provide for the differing degrees of care and carelessness shown by the particular haulier whose vehicle has been seized.  The policy is concerned with restoration fees rather than fines; but it is not dissimilar to the former policy of the Home Office in imposing fines on lorry drivers and their employers in respect of clandestine entrants.  That policy was ruled unlawful in International Transport Roth [2002] EWCA Civ 158.  The policy in question imposed a fixed fine of £2,000 per clandestine entrant on those responsible (which could be both the driver and the owner or hirer of the lorry in which the clandestine was concealed) unless they could establish they were acting under duress or that they had neither constructive nor actual knowledge of the clandestine entrant.

25.	The Home Office introduced a “Level of Penalty Code of Practice” to which regard was to be had in determining the amount of penalty to be imposed on a carrier under section 32 of the Immigration Asylum Act 1999.  The level of fine to be imposed on the haulier will, depending on how his level of culpability matches the examples set out in the Code of Practice, fall into one of four brackets, namely “lower range”, “middle range”, “upper range” and “maximum penalty”.  Something on those lines that replaces paragraph 2 of the present Restoration Policy would, we think, lead to a more proportionate and defensible treatment.  Paragraph 1 of the Restoration Policy is of course different.  It is not concerned with carelessness.  It covers the complicit individual owner and the company which, through corporate responsibility based on the acts of its management, is to be regarded as complicit.

26.	Our view of the evidence in the present case is that H&S should fall into the lower range.  It should not have employed Mr Knoblich without a reference.  But in other respects its standards appeared to us to have been unimpeachable.  

27.	This leaves the starting figure, i.e. the maximum fee prescribed by the Restoration Policy in its present state.  This is “a fee equal to 20% of the revenue involved or the trade value of the vehicle whichever is lower”.  H&S criticized this on two grounds.  The one, which we have already dealt with, is that it produces a “one size fits all” figure.  The other is the use of  “trade value”.  This means in effect that the haulier is required to buy the vehicle back from the Commissioners for a price which may be the same as or even higher than the market price of such a vehicle.  The Glass’s Guide trade value will be an indication of trade prices in the UK.  But these may bear no relation to prices and values in other countries.  The Commissioners responded by showing a schedule of prices to demonstrate at how in the UK the Glass’s Guide trade value of a particular vehicle can be as much as 30% below its market value.  They needed a clear benchmark and this was as good as any.  

28.	We have already decided that the decision under review was unreasonable because it adopted a flawed policy. Consequently this last point does not strictly arise.  We nonetheless express the view that a formula for reaching a maximum prescribed figure, similar to that in the present Restoration Policy, would be a justifiable and certain starting point.  The exercise would then be one of evaluating the level of culpability of the haulier and, if appropriate, of mitigating the fee for restoration accordingly.  We say this bearing in mind that the exercise of the power to restore is discretionary and is not subject to the same urgent time constraints that in practice govern the exercise of the power to seize.  The Commissioners have, or should have, time available to them to find and evaluate the circumstances of the illicit importation.  

29.	We allow the appeal.  We direct that the matter be the subject of a further review to be conducted within 45 days taking into account the findings and conclusions expressed in this decision.

30.	We award H&S its costs of an amount to be agreed.  If this cannot be agreed, the question of costs should be referred back to this Tribunal (chairman alone) for further directions.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:

LON/03/8175