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image of no smoking sign | accountingweb | Farmer not liable for duty-unpaid cigarettes stored by third party on his land
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HMRC’s duty-unpaid cigarettes case stubbed out

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When illegal cigarettes were found stored in outbuildings on his land, a farmer was dragged into a £808,842 excise case, even though he had not known they were there.

5th Jul 2024
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A farmer who rented out storage units on his farm was pursued by HMRC for duty on illegal cigarettes stored there, despite not being aware they were there.  

With little precedent from case law to turn to, the first tier tribunal (FTT) relied heavily on the everyday meanings of words and expressions in the appeal against £970k excise duty and penalties.

There is increasing pressure on farmers to explore alternative money-making activities to supplement their revenue from farming. Many decide to diversify their business by renting out surplus land and/or buildings on their farm for use as storage by third parties. This can be a nice little money spinner, but could expose the landowner to legal risk if the spaces are used for nefarious purposes by the renter. 

Giles Bunting rented out several storage units on his farm. In September 2016 HMRC officers made a surprise visit to the farm and seized 2,537,600 duty-unpaid cigarettes discovered inside one of the rented-out units.

Ash-essment and penalties

Although the unit was rented to a third party, referred to as “CD” in the judgment, HMRC informed Bunting that he was jointly and severally liable to pay the excise duty assessed of £808,842 on the basis that he was an “other person involved in the holding of the excise goods” (Regulation 10(1) of the Excise Goods (Holding Movement and Duty Point) Regulations 2010).

As he had access to the unit at any time, HMRC claimed Bunting was “concerned in the keeping” of the cigarettes within the meaning of paragraph 4(1) Schedule 41 FA 2008 and slapped him with a penalty of £161,768 for non-deliberate behaviour. Conceding that he was unaware that the unit was being used to store illicit cigarettes, HMRC argued that he had nevertheless failed to carry out adequate due diligence on the tenant.

Bunting appealed against both decisions claiming that he did not know about the contraband, had remedied his failure promptly and had complied fully with HMRC from the start of the investigation. 

Filtering the information

The lease agreement included a covenant preventing the tenant from allowing the property to be used for any illegal or immoral purposes. However, the contract was not technically between Bunting and CD. Originally the unit had been let to a previous tenant, “AB”, who had sublet part of the unit to CD. When AB fully vacated the unit, CD informally took over the rights and obligations of the lease and began paying rent in cash directly to Bunting.

There was no new written agreement and HMRC argued that in allowing an “unknown person… to store unknown goods on his property” Bunting had “put himself at risk of dealing with someone who might be holding contraband excise”. He did not perform any background checks or ask CD for any formal identification.

HMRC argued that in turning a blind eye Bunting became “involved in the holding” of the excise goods as well as “concerned in the keeping” of the cigarettes for the purposes of both the duty and the penalty.

What’s in the box?

Despite the unusual circumstances of the lease, the judge found that on the whole Bunting’s dealings with CD were bona fide arm’s length business arrangements.

There was no evidence to suggest (and HMRC did not contend) that Bunting had any means of knowing the illicit contents of the unmarked boxes. Although he was entitled to enter the unit at any time for any purpose, this did not give him authority to interfere with goods held inside. The lease agreement with AB did not give him permission to open boxes to inspect their contents and the judge inferred that any oral agreement with CD would have mirrored this.

On HMRC’s assertion that Bunting’s failure to mitigate the “greater than reasonable risk” of illegal goods being stored on the premises the FTT found that there was no legal basis for that test. On HMRC’s argument that Bunting had failed to assess CD adequately as a tenant the judge noted: “Even if the appellant had required CD to provide proof of his identity, to enter into a formal written lease agreement, and to pay by bank transfer rather than cash, this is unlikely to have revealed to the appellant that duty-unpaid cigarettes were being held in the unit. No evidence suggests that it would have made any difference.”

Smokes and semantics

The judge noted that there is very little case law on the meaning of the words “involved in the holding” and turned instead to the interpretation of the expression in everyday language, likening it to “participate in” or “take part in”. As Bunting was unaware that the goods being stored on his property were duty-unpaid cigarettes, the FTT concluded that by merely permitting a third party to hold goods on his premises he had no involvement in the holding of those goods. 

Turning to the penalty, the FTT decided that the everyday meaning of the term “concerned in” has the same meaning as “involved in”. Further, “keeping” is not defined in the legislation and the judge agreed with HMRC that the word “amounts to custody of (in the sense of possession to control) or looking after”.

Bunting did not have physical possession of the cigarettes, he was not entitled to take possession, and he did not have any intention to possess them, so the judge concluded that he was not “involved in the holding” of the cigarettes. Nor was he “concerned in carrying, removing, depositing, keeping or otherwise dealing with” the cigarettes within the meaning of paragraph 4(1) Schedule 41 FA 2008. 

The judge allowed Bunting’s appeal, quashing the assessment and the penalty.

Replies (15)

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By FactChecker
05th Jul 2024 20:40

Another example of HMRC trying to fall upon what looked (to them) like easy prey, without taking much obvious care to determine either the reality or the risk.

I bet that if you took the decision-makers off on one of those 'team-bonding' weekends and showed them two small rivers (one containing alligators and one with very small fish) before asking them to choose into which river they'd prefer to plunge their hand for 10 seconds ... the alligators would remain hungry (unlike the piranhas)!

Can't you just see the Excise officers grumbling: "No-one told me he had teeth!"

Thanks (7)
Replying to FactChecker:
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By More unearned luck
07th Jul 2024 15:00

One of the egregious aspects of case like this is that the taxpayer is out of pocket by the cost of his defence, not to mention the worry of facing demands from HMRC of about £1m.

Thanks (8)
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By Paul Crowley
06th Jul 2024 16:22

HMRC really are a waste of space. They agreed that he had no knowledge of the illegal activity, but decided to waste our money on a hopeless attempt to punish him. Twice, by adding a penalty.
This is the type of activity that should be named and shamed.

Thanks (13)
Replying to Paul Crowley:
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By C Graham
08th Jul 2024 09:36

Should be in national news not just this forum

Thanks (3)
the sea otter
By memyself-eye
07th Jul 2024 11:16

Good job this ridiculous case was thrown out, else any AIRBNB, Hotel, Container hire business or even scout group hiring out premises would be 'involved' in illegal activity vacariously.

Thanks (8)
Replying to memyself-eye:
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By Ian Narbeth
08th Jul 2024 11:21

Indeed, any landlord of premises used for storage (or perhaps the freeholder of a leasehold shop used for selling duty unpaid cigarettes or spirits) would be at risk of a claim by HMRC, especially if the malefactor had disappeared or was impecunious.

It is not as if the tenant was running a brothel or growing cannabis where there would be suspicious activity: just boxes inside other boxes. Even if the farmer knew there were cigarettes, the lease would grant him no right to interrogate the tenant as to whether duty had been paid.

Will there be any sanction for those at HMRC who pursued the famer? No, but the taxpayer will pick up the costs bill.

Thanks (2)
Replying to Ian Narbeth:
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By SimonP
09th Jul 2024 03:47

Two points.

1) What about landlords who own residential properties? Standard AST's state that the premises cannot be used for illegal activities but how is the landlord to know whether the tenants are storing illegal goods, such as in this case? Ridiculous!

2) And what a coincidence that HMRC decided to organise a raid on the farm and then broke into unmarked boxes. They must have had a search warrant to do that, if tv shows and YouTube are correct in their assertions. Yep. Definitely a coincidence.

Thanks (0)
Replying to memyself-eye:
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By towat
09th Jul 2024 09:41

Who owns 10 Downing Street? there's some well dodgy stuff goes on in there.

Thanks (0)
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By JustAnotherUser
08th Jul 2024 10:06

what a strange way to describe it as t 2,537,600 cigarettes

is that packs, or individual,

that would be 126,880 packs of 20 or 12,688 cartons.

according to chatgpt that's 1795.22 square meters of cartons. That's a lot of storage and movement.

Thanks (1)
Replying to JustAnotherUser:
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By roger.meyts
08th Jul 2024 11:52

rather, why not ask ChatGpt how much that represents in volume. Perhaps the clever "owner" stacked cartons in boxes which themselves were stacked on top of each other. Then work out how many steel containers that would fill, as many of these farms rent out these containers as storage units.

Thanks (0)
Replying to roger.meyts:
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By JustAnotherUser
08th Jul 2024 12:33

Classic Ai giving different answers is a sign of the future... the first estimate was way to big... not so intelligent.

Standard Cargo Container Dimensions
A common type of cargo container is the 20-foot container, which typically has the following internal dimensions:

Length: 5.9 meters (590 cm)
Width: 2.35 meters (235 cm)
Height: 2.39 meters (239 cm)
Volume of the Cargo Container
To calculate the volume of the cargo container:
Volume
=
Length
×
Width
×
Height
Volume=Length×Width×Height
Volume
=
590

cm
×
235

cm
×
239

cm
Volume=590cm×235cm×239cm
Volume
=
33
,
229
,
650

cm
3
Volume=33,229,650cm
3

Volume of One Carton
From the previous calculation:
Volume of one carton
=
1028.5

cm
3
Volume of one carton=1028.5cm
3

Number of Cartons
To find the number of cartons that can fit into the container, divide the volume of the cargo container by the volume of one carton:
Number of cartons
=
Volume of the cargo container
Volume of one carton
Number of cartons=
Volume of one carton
Volume of the cargo container

Number of cartons
=
33
,
229
,
650

cm
3
1028.5

cm
3
Number of cartons=
1028.5cm
3

33,229,650cm
3

Number of cartons

32
,
300
Number of cartons≈32,300

Therefore, approximately 32,300 cartons of cigarette packs can fit into an average-sized (20-foot) cargo container.

so less than one 20 foot container... here's a video for scale of a similar operation.
https://www.youtube.com/watch?v=VkjxW7ID7eI&t=26s

Thanks (3)
Replying to JustAnotherUser:
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By roger.meyts
09th Jul 2024 15:48

that makes a lot more sense

Thanks (0)
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By JamesDS
08th Jul 2024 12:36

This is almost the definition of the vexatious prosection.

HMRC need to be held accountable for this kind of stuff. At the very least they should be paying his costs, providing some osrt of compensation, and the officious idiot that oversaw the "investigation" should be disciplined.

Thanks (2)
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By paulwakefield1
08th Jul 2024 13:34

I wonder if HMRC checked that the rent paid in cash was declared.

Thanks (1)
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By Caber Feidh
08th Jul 2024 19:50

The FTT judge noted that there is very little case law on the meaning of the words “involved in the holding”. Now, after this misjudged action by HMRC, there will be a persuasive precedent to protect other farmers who have been unlucky when renting out their unused barns (unless HMRC appeal successively).

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