British-American Tobacco Ltd v HMRC First-tier Tribunal (Tax Chamber), 14 February 2017;  UKFTT 167 (TC): Tribunal clarifies tobacco manufacturers’ anti-smuggling duties
In a judgment handed down in final form last week, the First Tier Tax Tribunal provided the first ruling on the penalty provisions of section 7 A-C of the Tobacco Products Duty Act 1979 (“TDPA”).
In this test case, British-American Tobacco (“BAT”) appealed against a £650,000 penalty imposed by HMRC. Section 7A TPDA places a duty on tobacco manufacturers not to facilitate smuggling. The maximum penalty is £5 million.
The Tribunal held that the language of s7B(1) did not require proof that the manufacturer’s product had in fact been smuggled; it was enough to show that the manufacturer had failed to take sufficient steps to prevent its supplies being smuggled. The Tribunal also held that HMRC had to prove the grounds that led them to think there had been a breach of duty. The Tribunal found that HMRC had been entitled to make the penalty notice against BAT on some grounds but not others. The Tribunal therefore set aside the penalty notice, allowing BAT’s appeal in part and imposing a reduced penalty of £100,000.
The Tribunal’s decision is the first time that the amended penalty provisions of the 1979 Act have been judicially considered and the ruling addresses a wide range of issues, including the scope of the duty under s.7A, the applicability of EU competition law and the fair trial guarantees of the ECHR. Amongst other findings, the Tribunal held that the penalty amounted to a ‘criminal charge’ for the purposes of Article 6 ECHR and construed s.16(5) of the Finance Act 1994 so as to give the Tribunal a full merits-based jurisdiction to quash or vary HMRC’s decision and substitute its own decision; further, the Tribunal concluded that the reverse burden of proof under section 16(6) of the 1994 Act did not breach ECHR fair trial requirements. The Tribunal also found that in a final s.7 penalty notice HMRC is only entitled to rely on matters it had clearly identified in the requisite ‘Initial Notice’.