January 2021 will bring an end to the main opportunities for alcohol excise duty fraud and must mean changes to HMRC’s anti-fraud Due Diligence Condition
January 2021 brings in fundamental changes to the movement and control of excise goods from the EU to the UK. What were “acquisitions” from the EU will be “rest of world” imports, subject to full border controls. This will mean that the current opportunity for systematic alcohol fraud under the weakness of the EMCS (“inward diversion” fraud) is closed entirely. Further, the requirement for alcohol excise businesses to carry out the mandatory Due Diligence procedures (including those under the AWRS) as set out in public notices, must urgently be reviewed by HMRC to reflect the entirely different supply chains for excise goods moved between the EU and the UK.
Features of alcohol excise duty fraud
Alcohol duty fraud has been primarily in inward diversion of large volumes of popular (and relatively inexpensive) British-produced brands of lager. Its most severe effects were felt by the wholesale sector and the impact was exacerbated by HMRC’s inability to counter the problem.
There has additionally been a lesser problem with popular third country wine brands, but, as highlighted repeatedly by HMRC’s Fraud Investigation Service, the main issue was beer. Indeed, this was the conclusion of the 2012 All Party Parliamentary Beer Group’s report on the matter, which took evidence from HMRC, Border Force, other regulatory bodies, industry trade-body representatives and businesses.
HMRC’S description of the fraud was summarized in last year’s Court of Appeal case “Seabrook Warehousing Ltd ” 2019 EWCA Civ 1357 by Henderson LJ at :
a) A movement of goods is arranged, moving goods to the UK under duty suspension for consignment to an account within a receiving excise warehouse in the UK.
b) The movement is entered onto EMCS, and is known as “the cover load”.
c) The cover load will leave for the UK. If it reaches the UK, and passes through the frontier without being checked by UK Border Force, it will “park up” and not go direct to the warehouse.
d) At this point, a number of identical “mirror loads” will be created, with the same Administrative Reference Code (“ARC”) as the cover load. These mirror loads will then be transported into the UK, until one of them is intercepted or until the journey time stated on the original EMCS expires.
e) If a mirror load is detected, it will use the details of the cover load to legitimise itself and will make its way to the UK warehouse. The ARC will then be discharged, and the cover load which has been “parked up” will probably be, in the jargon, “slaughtered” (i.e. broken up and distributed).
f) If none of the mirror loads is intercepted, they can then all be “slaughtered” and enter the UK home market without payment of any excise duty or VAT.
From 2021, supply chains and revenue risk will be very different for movements between the UK and the EU and most importantly, the main risk of alcohol excise inward diversion fraud will simply be extinguished. This is because when the UK exits the EU following the end of the transition period, EMCS will be switched off for intra-EU trade, which means the weakness of EMCS for inward diversion of fraudsters using multiple mirror loads under cover of a single ARC will not be possible. Import declarations will have to be made and excise goods will always be subject to control checks, which is not currently permitted under Single Market rules. The risk of fraud will therefore be reduced by these measures. That is not to say that fraud may not mutate, but “container fraud”, akin to tobacco duty fraud (i.e. plain old fashioned smuggling) seems unlikely.
This will also mean that the current Due Diligence Condition set out in HMRC’s public notices must be revised substantially or removed entirely. The current policy really deals with intra-EU movements and inward diversion fraud as described in the Seabrook Warehousing case, i.e. risks in EMCS alcohol supply chains between the UK and the EU. The supply chains will not be subject to EMCS from January 2021 and as a consequence HMRC’s entire policy will need re-consideration, particularly in respect of the heavy burdens it has imposed upon the legitimate alcohol sector.
28 November 2020
HM Government Alcohol Duty Review Call for Evidence 2020 - BDA response
The British Distillers Alliance has responded to the government’s Alcohol Duty Review (ADR) Call for Evidence. Copies of the response are available upon request.
There are two elements to the ADR: rates and structure (HM Treasury) and management of the revenue (HMRC). In terms of the former, the main issues are fairer tax for spirits (tax by unit for all alcohol) and reduced rates for smaller producers. In the case of management of the revenue, this runs in tandem with HMRC’s modernization and simplification programme, for which the BDA has also made submissions, reiterated in the ADR response.
At a Joint Alcohol and Tobacco Consultative group meeting on meeting on 24 November, HMRC addressed the status of the ADR, with the following points:
Stakeholder engagement (other than HMG) comprises industry, economists and the public health sector;
HM Treasury will engage with minister before Christmas and “shape proposals”
There will be consultation on proposals including a “technical” consultation
These consultations will be announced next year — possibly at a “Budget event”, taking matters thereafter into 2022.
Constraints will be (as always) systems capacity and legislative space.
The BDA will participate in further interim discussion.
8 October 2020
BDA welcomes HMRC Policy change to remove requirement for excise warehouse premises guarantees
HMRC has just announced an extremely welcome policy change removing the requirement for a premises guarantee to be in place as a condition of excise warehouse approval. Until this month, a premises guarantee has been a requirement for excise warehouse approval, albeit it has been possible for “trade facility” policy excise warehousekeepers to have a “nil” level of security where there is no more than £100k duty stockholding at month end.
By circular of 28 September 2020 to members of the Joint Alcohol and Tobacco Consultative Group (JATCG), HMRC stated:
“Excise premises guarantees will also be changing from 1 January 2021. This will allow most GB and NI businesses to operate an excise premises without a guarantee. This will be subject to risk and compliance checks by HMRC. This policy change will apply to both storage and production premises.
HMRC is currently reviewing all existing premise guarantees to identify those that can be cancelled. HMRC will notify businesses who do not satisfy the risk and compliance checks, as these guarantees will be retained. It is expected we will complete this work by 1st January 2021.”
At the virtual JATCG meeting of 7 October 2020, HMRC confirmed that excise warehouse premises guarantees would be applied “by exception” ie the requirement for a guarantee would be exceptional, not the norm. HMRC’s position is that a guarantee could be required for cases of non-compliance by a warehousekeeper (or applicant for warehouse approval) or other revenue risk.
Whilst the policy change is welcomed, the BDA nevertheless believes that HMRC misses the purpose (or rather, lack of purpose) of a premises guarantee. HMRC has manifold appropriate sanctions to improve compliance of a warehousekeeper incrementally or with immediate severity. The premises guarantee is not really part of such compliance measures and never covers the full extent of revenue in duty-suspension. Instead, a premises guarantee is really an archaic, blunt “long stop” in the unlikely event that a warehousekeeper did not pay assessments to duty on pilferages or unexplained stock deficiencies.
To put this into context, HMRC has never routinely require licensed wine producers or cider-makers or registered brewers to provide a premises guarantee for excise duty suspension. It is discriminatory, therefore, for a premises guarantees to be imposed upon excise warehousekeepers who may “hold” such alcohol products (as well as spirits). Alan Powell and the BDA have lobbied hard for years for removal of warehouse premises guarantees imposed as a matter of routine by HMRC since they are not necessary or effective for compliance purposes and are discriminatory vis a vis “production” tax warehouses.
2 October 2020
UK Alcohol Duty Review starts - call for evidence
HM Treasury has advised the BDA that the Call for Evidence by the UK government into alcohol, duty rates and structures has commenced. The link to the web site is here: https://www.gov.uk/government/publications/alcohol-duty-review-call-for-evidence
The government committed at Budget 2020 to undertake a review of the alcohol duty system. This area of policy was previously harmonised by EU law. The UK is now able to set its own law in this area.
The aim of the Alcohol Duty Review is said to improve the current system to make it simpler, more economically rational and less administratively burdensome on businesses and HMRC. This call for evidence seeks views from respondents on how well the current system works (both for the individual duties and as a system as a whole), and also looks at whether:
the method of alcohol taxation should be standardised
the duty categories should be changed or unified
products should be consistently distinguished by their strength
distinctions should be made based on the place of retail
small producer reliefs should be extended or standardised
duties could be uprated for inflation in a more consistent manner
a single process for approvals, declarations and payments should be introduced
more could be done to tackle avoidance and evasion of duty
The BDA has been ready to contribute to this call for evidence since the Budget announcement and will participate with submissions to HMT about both duty rates and the entire taxation structure.