L00021
AGGREGATES LEVY — aggregate sold and removed from originating site prior to commencement date but repurchased and returned there prior to that date — whether liable to levy where not chargeable under original legislation but only following retrospective change excepting only aggregate on site other than originating site — appeal dismissed.
AGGREGATES LEVY — underdeclaration penalty — imposed against background of retrospective change in legislation and incorrect information in Customs Notice — reasonable excuse — appeal allowed.
AGGREGATES LEVY — exception for aggregate removed in course of dredging undertaken for restoring, improving or restoring watercourse — whether extension to waterbody created by dredging constitutes watercourse — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
HUMBERSIDE AGGREGATES AND EXCAVATIONS LTD Appellant
- and -
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
Tribunal: David Demack (Chairman)
Gillian Pratt
Sitting in public in York on 22 October 2004
Michael Juggins for the Appellant
James Puzey of counsel instructed by the Solicitor for the Customs and Excise for the Respondents
© CROWN COPYRIGHT 2004
- The appellant company, Humberside Aggregates and Excavations Ltd ("Humberside"), appeals against:
(1) a decision on review of the Commissioners of Customs and Excise given on 18 December 2003 confirming an assessment to aggregates levy of £66,241, plus a civil penalty of £3,321.05 for underdeclaration of levy, for the period 1 April 2002 to 30 June 2002; and
(2) a decision on review of the Commissioners also given on 18 December 2003, confirming an assessment to aggregates levy of £56,232, for the period 1 January 2003 to 31 March 2003.
- Facts common to both appeals are that Humberside carries on the business of excavation and the sale of aggregate from a quarry at Brough, Humberside. It was registered for the purposes of aggregates levy on the levy being introduced on 1 April 2002.
- The remaining facts of the two appeals differ widely, so that we propose to divide our decision into two parts: the one dealing with Humberside's appeal against the levy assessment of £66,241, and the other dealing with the assessment of £56,232. We shall call the former the First Appeal, and the latter the Second Appeal.
- But first, we should explain that by section 16 of the Finance Act 2001 ("the 2001 Act") aggregates levy is to be charged whenever a quantity of taxable aggregate is subjected to commercial exploitation; and the person to be charged is the one responsible for its being so subjected on that occasion. "Aggregate" is defined in section 17(1) as " any rock, gravel or sand, together with whatever substances are for the time being incorporated in the rock, sand or gravel or naturally occur mixed with it". By section 17(2) "any quantity of aggregate is, in relation to any occasion on which it is subjected to commercial exploitation, a quantity of taxable aggregate"; and by section 19, aggregate is commercially exploited if it is removed from its originating site in the course of furtherance of a business carried on by the person subjecting it to exploitation. "Originating site" is defined in section 20 as including the site from which the aggregate is won.
The First Appeal
- There is no dispute as to the facts of the first appeal. Humberside simply sought to take advantage of the fact that section 17(2)(d) of the 2001 Act, as originally enacted, excepted from levy "aggregate that was removed from its originating site before the commencement date". The commencement date was 1 April 2002.
- Prior to 1 April 2002, Humberside sold 41,400.80 tonnes of building and concreting sand to Medley Plant Hire Ltd ("Medley") for £1 per tonne. The aggregate was removed to Medley's own nearby quarry. Medley then resold the aggregate to Humberside for £1.20 per tonne. By 1 April 2002, the whole 41,400.80 tonnes had been returned to Humberside's Brough quarry. Subsequent to 1 April 2002, Humberside sold the sand to genuine customers.
- Clearly, on those facts the conditions contained in the original version of section 17(2)(d) were met, and had the subsection remained in that form Humberside's attempt to avoid levy would have succeeded.
- But, in his Budget of 15 April 2002, the Chancellor of the Exchequer announced that section 17(2)(d) of the 2001 Act was to be amended retrospectively amended. (The possibility of changes to the subsection had been presaged in Business Brief 17/01 issued on 28 November 2001). As amended, (see section 132 of and Schedule 38(3) to the Finance Act 2002), subparagraph (d) of section 17(2) provides that aggregate is taxable aggregate except to the extent that "it is aggregate that on the commencement date is on a site other than its originating site, . . ."
- It was against that factual background that the Commissioners assessed Humberside to levy of £66,241. (Levy is charged at a rate of £1.60 per tonne). And, as we mentioned earlier, the decision to assess was confirmed on review on 18 December 2002.
- For Humberside, Mr Juggins, a major shareholder of and former director in the company, maintained that a second or third commercial exploitation of aggregate was not liable to levy under the terms of section 17(2)(d), as amended. (He claimed that the second exploitation was Medley's resale to Humberside, and the third was Humberside's sale to genuine customers). In response, Mr Puzey, counsel for the Commissioners, submitted that, as aggregates levy did not exist until 1 April 2002, there could have been no commercial exploitation, as statutorily defined, prior to that date. He maintained that Humberside fell to be assessed to aggregates levy because, on the commencement date, the sand had been returned to its originating site.
- Mr Puzey did, however, accept that Notice AGL 1 issued by the Commissioners both before and after section 17(2)(d) was amended indicated at sections 2.1 and 3.1 that the levy did not apply where aggregate was removed from its originating site before the commencement date. He added that the Notice did not have force of law; and, in so far as Humberside relied on it to allege misdirection by the Commissioners, the tribunal was unable to grant it relief.
- In any event, Mr Puzey observed, the original version of section 7(2)(d) provided that to escape levy the aggregate had to have been removed from its originating site before the commencement date. He submitted that that did not indicate, nor could be read as indicating, that material which had been removed from the originating site for a period of time and returned prior to 1 April 2002 was exempt from levy.
- As all the aggregate sold by Humberside to Medley had been returned to Humberside's site by the commencement date, it is the fact that the aggregate was on its originating site on that date. Plainly, on the basis of the amended version of section 17(2)(d), it is liable to levy, and we so hold. In doing so, we have considered, and rejected, Mr Juggins' claim that second and third exploitations of aggregates (as he defined them) are not liable to levy. We dismiss Humberside's appeal against the assessment to levy of £66,241.
- By paragraph 9 of Schedule 6 to the 2001 Act (for which Schedule section 28 of the Act makes provision), where a person makes a return understating his liability to aggregates levy, he is liable to a penalty of 5 per cent of the amount of that understatement. However, he will not be liable to a penalty if he satisfies the Commissioners or, on appeal, a tribunal, that there is a reasonable excuse for his conduct. Although Mr Juggins did not address us about the penalty assessment, we consider ourselves able quickly and easily to deal with Humberside's claim to have a reasonable excuse for its underdeclaration. As the steps taken by Humberside to avoid tax were perfectly legitimate, and would have succeeded in achieving their purpose had not the 2001 Act been amended retrospectively, we consider it to have a good prima facie reasonable excuse for its underdeclaration of tax. And when coupled with the fact that the Commissioners continued to provide taxpayers with incorrect information after the 2001 Act had been amended in Notice AGL 1 (see paragraph 11 above), we hold it to have established its case to have such an excuse. We therefore allow the appeal against the penalty assessment.
The Second Appeal
- Our findings of fact in the second appeal are based on a bundle of copy documents supplied by each party, and the parol evidence of Mr Juggins and Mr Daniel John Walters, a specialist officer of Customs and Excise with a B.Sc. in exploration and mining geology. They are to be found in the next following four paragraphs.
- Yorkshire Wildlife Trust ("YWT") acquired an area of land at Dryham Quarry, North Cave, East Yorkshire, from Humberside on which were 6 waterbodies (to use a neutral expression to describe ponds and lakes of various sizes and depths). Those waterbodies, known as Lakes 1 to 6, were created by Humberside excavating sand and gravel from the land and leaving the resultant excavations to flood with groundwater and incidental rainfall. Flooding occurred because the sand and gravel deposits at the site were water bearing, and the water in the waterbodies was in hydraulic continuity with the groundwater in the deposits. Channels of occasional rivulets in the sandy banks of the waterbodies confirmed that incidental rainfall ran into the six Lakes.
- In 2002, to improve the habitat of wading and water birds and to encourage them to breed, YWT decided to extend Lake 6 by excavating 4 acres of land immediately adjoining it. It obtained planning permission for "site restoration including the excavation and removal from site of sand and gravel to create shallow waterbodies for nature conservation purposes". YWT and Humberside then agreed that Humberside should carry out the excavation work and, in return, Humberside would be allowed to keep and sell the aggregate won. In all, Humberside extracted 35,145.04 tonnes of sand and gravel, which it sold. It did not, however, account for aggregates levy on the aggregate sold claiming that, as it had been won as the result of dredging works carried out exclusively for the purpose of restoring, improving or maintaining a watercourse, it was exempt. The Commissioners did not accept its claim and assessed it to levy of £56,232 (35,145.04 x £1.60 per tonne).
- As it did at the time with which the appeal is concerned, water from Lake 6 drains into Lake 4 by means of an underground 8in pipe, and into Lake 5 by means of a channel. From Lakes 4 and 5, and from the remainder of the YWT site, water flows into a brook called Black Dyke, which is part of the Market Weighton Drainage Board's drainage system, and eventually makes its way into the River Humber.
- Because the water in Lake 6 as extended is in hydraulic continuity with the groundwater in the sand and gravel deposits surrounding it, water drains from Lake 6 into Lake 4. But the flow is not apparent on the surface of Lake 6, even during and after rainfall when water drains into it in greater quantities than usual: to the observer Lake 6 appears to be stagnant.
- Humberside's claim for exemption is based on section 17(3) of the 2001 Act, which, so far as relevant, is in the following terms:
"For the purposes of this Part aggregate is exempt under this section if-
(c) it consists wholly of aggregate won-
(i) by being removed from the bed of any … watercourse (whether natural or artificial) …; and
(ii) in the course of the carrying out of any dredging undertaken exclusively for the purpose of…restoring, improving or maintaining that …watercourse."
- Mr Juggins relied on the Commissioners' Notice AGL 1 (paragraph 3.4) to maintain that Lake 6, as extended by the works carried out, constituted a watercourse. That subparagraph provides the answer to the question "What is a watercourse?" as follows:
"a body of water that must demonstrate a:
* natural source of surface or underground water;
* flow under the action of gravity;
* reasonably well-defined channel of bed and banks; and
* confluence with another watercourse or tidal waters."
- He submitted that it was self-evident that the first and second of those conditions were satisfied. Of the third, Mr Juggins maintained that there was a clearly defined bed along which the water from Lake 6 flowed; and all the Lakes had banks. And, in reliance on Webster's Dictionary definition of "confluence" – "any running together of separate streams or currents" – he contended that the fourth condition was also met.
- In his review under appeal, Mr Walters dealt with Humberside's claim that Lake 6 as extended qualified as a watercourse by saying:
"For the purposes of the levy, my understanding is that to qualify as a watercourse, the water must flow from the start through a well defined channel to a confluence with another watercourse.
In answer to the question of whether we have a watercourse, I do not believe this to be the case for the following reasons:
- drainage from the second pond is through a pipe running under the road. I do not think that this qualifies as a "channel". My understanding is that a channel would mean either an existing natural flowing channel or an artificial channel created to divert a naturally flowing stream (such as a man made culvert used to divert water under roads etc)
- there is no channel of water into the new pond, water either enters the pond as ground water or by excess surface water
- the water moves from this pond into another pond. This is not a confluence with another watercourse."
- Mr Puzey made his submissions on the basis that Humberside did not dispute that the sand and gravel was "aggregate" within the meaning of section 17 of the 2001 Act; and that the supply was a commercial exploitation within the meaning of section 19 of the Act.
- Whilst accepting that "watercourse" was not statutorily defined, he submitted that it should be given a meaning satisfying the general guidance offered by Notice AGL 1. He observed that it had been judicially defined in a number of cases, most notably in the Australian decision of Lyons v Winter [1899] 25 VLR 464, where the court held that: "To constitute a watercourse such as creates riparian rights there must be a stream of water flowing in a defined channel or between something in the nature of banks. The stream may be very small and not always run, nor need the banks be clearly or sharply defined; but there must be a course, marked on the earth by visible signs, along which water flows". Mr Puzey maintained that water percolating discontinuously through or along strata could not be described as a stream, M'Nab v Robertson [1897] AC 129, nor could water which did not flow in a definite course such as surface drainage, Kena Mahomed v Bahatoo Sircar [1863] Marsh 506, a decision of the High Court of Bengal.
- Mr Puzey sought further assistance as to the meaning of "watercourse" in the present context from section 221(1) of the Water Resources Act 1991. That subsection provides that watercourse "includes all rivers, streams, ditches, drains, cuts, culverts, dykes, sluices, sewers and passages through which water flows, except mains and other pipes" which belong to the National Rivers Authority or a Water Undertaker, or are used by a Water Undertaker or other person for the purpose only of providing a supply of water to any premises. Mr Puzey submitted that that definition clearly did not include ponds or lakes. However, since the same provision defined "inland waters" as meaning "(a)any river, stream or other watercourse" and "(b) any lake or pond, whether natural or artificial or any reservoir or dock in so far as the lake, pond, reservoir or dock, does not fall within paragraph (a) of the definition", he contended that, whilst it was possible that lakes or ponds might fall within the definition of a watercourse for the purpose of being "inland waters", it had been considered necessary separately to list non-moving bodies of water, presumably, because they would not normally be considered as coming within the definition of a watercourse.
- In reliance on a report of 27 November 2003 from M J Carter Associates obtained by Humberside clearly showing that ground water drained away from Lake 6. Mr Puzey submitted that that Lake did not, in any event, "flow" into the adjoining Lake, and albeit that there was a drain connecting the two, any outflow from the former was generally as groundwater. He further submitted that the presence of a drain did not of itself turn either or both waterbodies into a watercourse; the drain simply helped to maintain a standard level of water in Lake 6, which was not a watercourse.
- Mr Puzey therefore finally submitted that the aggregate extracted from Lake 6 had not been removed from a watercourse within the meaning or contemplation of section 17 (3) of the Finance Act 2001: it was "taxable aggregate", and did not qualify for exemption from levy.
- Unless Humberside can bring itself within the exemption for which section 17(3)(a) of the 2001 Act provides, it is liable to the levy assessed. To achieve its objective, it must establish that Lake 6, as extended by the excavation works, is a watercourse.
- In our judgment, the answer to the question "What is a watercourse?" contained in Notice AGL1 is a perfectly adequate working definition for the purposes of aggregates levy. Dealing with the various requirements of that definition seriatim, we first observe that the extended Lake 6 has a natural source of underground water namely the surrounding sand and gravel bearing land, so that the first condition is satisfied. We are unable to accept that the water in Lake 6 flows under the action of gravity, notwithstanding the existence of the 8 inch drain between Lakes 4 and 6, as Mr Juggins submitted, for any outfall from Lake 6 simply achieves hydraulic continuity with Lake 4 by entering as ground water or rainfall rather than "flow". Of the third condition, that of there being a reasonably well –defined channel of bed and banks, we have no hesitation in concluding that the banks of the various lakes at North Cave are well-defined, but are not, in the absence of a "course, marked on the earth with visible signs, along which the water flows" prepared to agree with Mr Juggins' claim that there is a well-defined bed. As to the requirement in condition 4 that there must be a confluence with another watercourse, since we accept that a watercourse must satisfy the conditions laid down in Lyon v Winter, as supplemented by the decisions in M'Nab v Robertson and Kena Mahomed v Bahatoo Sircar, we hold that there is no confluence of Lake 6 with another watercourse. Humberside having failed to establish that Lake 6 is a watercourse, we dismiss its appeal.
David Demack
Chairman
Release Date: 9 December 2004
MAN/04/9500
MAN/04/9501
