Supreme Court: "reasonable suspicion" entitled customs officers to detain goods pending tax enquiries

The UK's highest court rejected judicial review challenges brought by two 'cash and carry' businesses, which had both had shipments of alcoholic goods detained by customs officials. The first business, Eastenders, challenged the detaining of goods that were later returned when HMRC's investigations proved to be inconclusive. The second business, First Stop, had argued that its goods could not legally be detained as a result of the Court of Appeal's decision in the Eastenders case.

In its judgment, the Supreme Court said that HMRC was incorrect to rely on section 139 of the 1979 Customs and Excise Management Act, which gives its officers the power to "seize or detain anything liable to forfeiture under the customs and excise Acts". However, it found that customs officers' statutory powers of examination, which is not conditional on the goods later being found liable to forfeiture, included reasonable detainment powers "by necessary implication".

"This judgment and the circumstances behind it are further evidence of the commitment of the government and HMRC to tackle fraud, evasion and abuse in the alcohol sector," said Darren Mellor-Clark, an expert in indirect taxation at Pinsent Masons, the law firm behind Out-Law.com.

"Tax and duty fraud poses a serious operational and financial risk to legitimate participants in the supply chain. All businesses would be well advised to ensure that they have robust procedures in place to verify the provenance of excisable goods and to ascertain their duty status. Such procedures must not simply exist on paper, but must be rigorously operated as part of the business as usual environment. Failure to do so exposes businesses to severe penalties," he said.

In the Eastenders case, customs officers entered the wholesaler's premises to inspect consignments of alcoholic goods. As employees were unable to provide documentary evidence that duty had been paid on them, the officers decided to detain the goods to give them time to carry out further enquiries. Eastenders applied for a judicial review of the decision to detain those goods that were returned after those investigations. Although its claim was dismissed by the High Court, the Court of Appeal later found that the relevant power under the 1979 Act only applied where the goods were actually liable to forfeiture.

In the First Stop case, customs officers again detained alcoholic goods on suspicion that duty had not been paid. This time, the officers provided a written notice stating that the goods had been detained under section 139. Again, some of the goods were later returned to the business after HMRC investigations. In this case, the High Court held that detention of all of the goods was unlawful following the Court of Appeal's judgment in Eastenders, as the reason given for it was the need for investigation.

Section 139 of the 1979 Act gives customs officers two distinct powers: one to seize goods and one to detain goods. In both cases, these apply to goods that are actually liable to forfeiture under one of the various forfeiture provisions. The Act does not expressly state that these powers can be used on the basis of "reasonable grounds for suspicion or belief", unlike other powers conferred by the legislation. Instead, the Supreme Court said the use of these powers must turn on "objectively ascertained facts, and not on the beliefs or suspicions of the Commissioners or their officers, however reasonable".

However, the Supreme Court said that this interpretation of section 139 would have "troubling implications" if customs officers had no other power to detain goods. Referring to the power of detention that existed before the customs legislation came into force, it said that this was not "expressly conferred by the customs and excise legislation, but arose by necessary implication from the officers' statutory power to examine goods for the purpose of determining the duty payable or whether they would be liable to forfeiture". This power was not abolished by the legislation that created the section 139 power, it said.

"Temporally, the powers are distinct: the process of examination precedes the reaching of a conclusion whether goods are liable to forfeiture," the court said.

"In terms of purpose, the powers are equally distinct. The purpose for which the power to detain, as an incident of examination, may be exercised is to enable the officers to retain control over the goods temporarily until they have arrived at a conclusion as to the duty payable or as to whether the goods are liable to forfeiture. The purpose for which goods may be detained after such a conclusion has been reached is plainly different," it said.

Litigation expert Craig Connal QC of Pinsent Masons said that the methods used by the Supreme Court when coming to its conclusion illustrated its "determination" to "reach what it believes to be the correct decision, even if that involves departing from what the parties have argued over a long period".

"Although rejecting much of what HMRC argued, the court came by a different route to a result which, in practical terms, was in their favour," he said. "Whatever be the merits of that decision, it does not make advising and predicting results any easier!"