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Excise – a consumption tax which must be legislated clearly, post Brexit


At the very moment Britain prepared to vote for Brexit, the EU court (CJEU) was giving a massive boost to the beleaguered UK alcohol excise  industry by confirming a simple but highly significant principle - excise duty is a tax on consumption.  This might seem obvious and trite, but HMRC has always refuted this principle because of its beneficial consequences to both the industry and taxpayers.

Alan Powell, specialist excise duties consultant, said: “The plain legal facts are now clearly spelt out and must be protected post Brexit.  In summary:

  • excise goods must be produced in a tax warehouse and there must be a system to suspend the duty (i.e. a relay system of tax warehouses);

  • since excise duty is a tax on consumption, it is necessary that the duty is suspended as near to the real consumer as possible;

  • if goods do not physically leave tax warehouse/duty suspension, there is no availability for consumption and no duty liability, even for technical irregularities.


The UK has failed to apply these principles in most cases and, in terms of duty charged for ‘technical irregularities’ has been unlawfully plundering alcohol businesses for many years.  HMRC must immediately recognize and implement EU law correctly. 

The best principles of EU law for excise duty in UK law must be confirmed during the Great Repeal Act, especially the principle that excise duty is a tax on consumption.”  Powell warns that “If industry does not press its case, there is a risk - as evidenced by HMRC’s latest attacks on the alcohol sector - that HMRC will look to drive the duty point further back for alcohol products, as they have already done for oil and tobacco and become, in effect, an ‘early’ tax and burden on business.”


Excise as a consumption tax

HMRC has always argued that “consumption” doesn’t mean consumption by a consumer, but this is not true and was proven to be the case in 2016 at the CJEU.

The CJEU case C‑355/14 Polihim-SS’ EOOD (“Polohim”) of 2 June 2016 has now ruled incontrovertibly that excise duty is a tax on consumption (per recital 9 to Directive 2008/118/EC as also found in the BP Europa SE case (also 2016)).  

In looking at what a tax on consumption means, Polohim also builds on foundations set out in previous case law which identify that, whilst excise goods have a liability to duty following production or importation, there is a structure of duty-suspension (i.e. tax warehouses) which enables the duty liability to be suspended and that the duty, as a tax on consumption, should be suspended as near as possible to the (final) consumer.

Moreover, Polohim determines that “so long as the goods in question remain in the tax warehouse of an authorised warehousekeeper, there can be no consumption, even if those goods have been sold by that authorised warehousekeeper”.

UK law and HMRC policy both impose arbitrary duty points and restrictions upon duty suspension, which are in clear breach of EU law and in denial of fundamental rights. 

Post Brexit

It is vital that the best principles of EU law are not only carried over in the Great Repeal Act, but also confirmed clearly in UK law.  Without industry vigilance, HMRC may unpick good law, legislate domestically to deny that excise is a tax on consumption and withdraw alcohol duty suspension. They cannot do so under existing fundamental EU law, but nevertheless it is reported that such action  is being mooted at high level.  HMRC’s end game may be to roll back alcohol duty suspension, although they already have severe and punitive powers - the latest example being AWRS.

British Distillers Alliance welcomes HMRC’s flexibility for alcohol production


The British Distillers Alliance has replied to HMRC’s consultation on revised and consolidated guidance for the licensing and approval of distillers, rectifiers and compounders on the deadline of 5 August 2016.


Alan Powell, co-founder of the BDA explains: “The new guidance is set in draft in Notice 39: Spirits Production, which brings together HMRC’s stated policies and procedures for the licensing and approval of all types of spirits production.  For the first time, a single HMRC public notice now covers the manufacture of gin and other spirits alongside “traditional” distilling of alcohol.  When finalized, it will give clear guidance and direction not only to the industry but also to HMRC staff having to deal with the licensing and control of spirits producers”.


Powell adds: “Notice 39 includes clear and fair guidance as to how to make a business case to be licensed as a distiller, together with certainty that HMRC will give approval in principle to an application where the details are not finalized but the overall plan is credible and the persons involved are “fit and proper”.  We very much welcome this guidance and have made a number of recommendations to further clarify other procedures set out in the Notice or remove conditions completely.”


Alan Powell concludes: “We commit to work collaboratively with HMRC to produce an effective guidance document for both new applicants and established businesses.  This exercise can also go some considerable way to map out a simplified system for the approval and control by HMRC of all alcohol production – what HMRC has previously called “the drinks factory” concept.

EU Review of Alcohol Excise Duties structure


The EU Commission has put out initial findings concerning its review and possible revision of alcohol excise duty structure (Directive 92/83/EEC).


The external review was conducted primarily by Ramboll Management Consulting.  In the executive summary, the review states, inter alia:


“Given that the legislative act in question, Directive 92/83/EEC, has remained  unchanged for more than 24 years, questions have been raised as to whether it is still fit for purpose in an EU market and international context whose characteristics have  evolved and expanded well beyond those observable at the time of its adoption in 1992.  As part of the EU Commission’s continuous effort to ensure that EU legislation remains fit for purpose, the present report seeks to  answer these questions by evaluating the

provisions of Directive 92/83/EEC.


This report, thus, assesses whether the Directive’s intended objectives remain relevant today; the extent to which the legislative act meets its original and current needs and whether it does so in an efficient and proportionate manner.”


The review concludes, in summary:


The Directive is instrumental in enabling the collection of excise duty on alcohol and alcoholic beverages in the context of the internal market at a general level, the Directive allows intra-community trade to take place free of significant tax-related trade barriers or major competitive disruptions between economic operators operating in the same sector of activity.


Moreover, our estimates of the overall levels of fraud indicate that the tax losses stemming from the application of the exemptions for denatured alcohol, although they are non-trivial, are minor in the context of the size of the tax gap associated with alcohol fraud overall.


Several weaknesses in the legislative environment partially undermine the above-mentioned conclusions as exemplified by situations where:

  • The same (or similar) products are treated differently for excise purposes in different Member States

  • Certain products deemed “difficult to classify” are perceived as abusing favourable excise tax categories, causing competitive distortions and loss of revenue.

  • Inconsistencies between the Combined Nomenclature (CN) classification and the excise classification create difficulties and a lack of clarity regarding the excise  classification of certain products.

  • Member States are unable to apply reduced rates to small producers for all categories of alcoholic beverages, unnecessarily limiting their ability to correct potential market imbalances where such a policy objective is pursued…


The summary main document states that the next steps will be to publish a Staff Working Document and submit a report to the Council to give the Member States the opportunity to discuss and agree if they feel change is appropriate. This will be accompanied by:

  • a first description of the problems and possible policy options detailed in an inception impact assessment

  • a consultation strategy to provide more information to stakeholders on the planned and upcoming consultation activities.



Press release: the British Distillers Alliance – a new craft spirits producers’ trade body

The British Distillers Alliance - the BDA -  has been established to promote the interests of the growing number of British distillers and other artisanal spirits producers.

Daniel Szor, founder and CEO of the award-winning Cotswolds Distillery and one of the founding members of the BDA, said: “It’s great news that we’ve set up a distiller’s alliance specifically for craft producers.  This is something which is long overdue – our young, dynamic and fast-growing industry desperately needs a voice in Westminster and with HMRC, among others.  We are an extremely positive force for employment, exports and tourism, and our story needs to be heard.” 

The formation of the British Distillers Alliance has been co-ordinated by Alan Powell, a specialist independent excise duties consultant.  Szor says: “We’ve known Alan for several years as one of the leading experts in fiscal and regulatory issues regarding beverage alcohol.  His assistance to us, as to many small start-up distillers, has been invaluable”. 

Powell explains “I already carry out high-level representative work for excise industries, so it won’t be too difficult to fit time for the BDA into my schedule.  Powell adds “I have been delighted with the overwhelmingly positive response and membership commitments from so many craft producers throughout the whole of the UK and the support of the Chairman of the Scottish Craft Distillers Association, who do such a great job for their own membership north of the border.”

BREXIT - taxation and duty matters 

HMRC 24 June 2016

On 24 June, HMRC published a very short Customs Information Paper 42/2016: EU referendum    


The Notice states: “We are still a member of the EU. Until Article 50 is invoked, we will continue to engage with EU business as normal and be engaged in EU decision-making in the usual way. Once it is invoked, we will remain bound by EU law until the terms of our exit have been determined but we will not be involved in decision-making. The period between invocation of Article 50 and our eventual exit from the EU is expected to last at least two years.”


On 27 June a briefing paper was placed in the House of Commons library dealing with tax after the EU referendum.   This commences: “Taxation is very largely a Member State competence. The implications of the UK lying outside the EU are likely to be less significant for taxation compared with other policy areas.  The major exception to this generalisation is indirect tax: primarily VAT – for which there is a substantive body of EU law establishing common rules across Member States – and, to a lesser extent, excise duties”.


The paper explains that an exit from the EU would allow the UK to extend existing VAT reliefs, or even abolish VAT altogether. However, the paper also considers this unlikely, given that VAT accounts for around 17% of government tax receipts.


For excise duties, Members States are required to apply minimum rates of duty (no maximum rate) and reduced rates exemptions are allowed in specified circumstances.  Government policy of all parties has been to apply massively higher rates than the minimum rates and it is highly unlikely that this would change after BREXIT. 


There is currently provision in the EU Alcohol Structures Directive 92/93/EEC for a reduced duty rate to be applied to spirits produced by small businesses but this is of very limited effect, even if it had been (or were to be) implemented by the UK.  The reduction is under review but if the UK were to leave the EU, the government would be free to set any reduced spirits duty rates for UK producers.   This would nevertheless be dependent upon the structure and terms of any trade deals under access to the Single Market.

Major revisions to HMRC’s Notice 39:  Spirits Production

HMRC have drafted a series of revisions to Notice 39 (Spirits Production).  The redrafted text can be found here.


The Notice, which is a core HMRC publication for all distillers, rectifiers and compounders, is significantly revised from its previous version and now includes reference to, inter alia:

  • Licences for rectifiers and compounders (following a total gap when the law was amended in 2012 and the relevant notice withdrawn);

  • The “fit and proper test” to licensed/approved;

  • Clarification of the HMRC’s policy on the discretionary licensing of distillers with stills of less than 18 hectolitre capacity;

  • distillation of third party fermented feedstock;

  • reference to the “Due Diligence” condition (an alcohol anti-fraud obligation).


The BDA will be making its comments to HMRC by the end of July 2016.

HMRC proposes simplification of alcohol production and registration


On 5 May 2016, Her Majesty’s Revenue & Customs (HMRC) met with alcohol industry trade bodies to announce proposals for current excise alcohol law and procedures to be simplified and rationalized.


HMRC’s stated plan in “pre-consultation” is to transform how businesses transact with HMRC across the alcohol taxes by:

  • simplifying tax across disparate alcohol regimes

  • digitising transactions in line with HMRC’s digital ambition for 2020

  • streamlining processes to support business growth


    “Excise law is long overdue an overhaul, so the proposals are very welcome” says Alan Powell, of the British Distiller’s Alliance. “There are currently far too many different bureaucratic and often ancient obligations to trade in excise goods in different regimes, including requirements for licenses, registrations, approvals, authorizations and making entry of premises and plant.  Similarly, there are different means to account for duty across the alcohol regimes and differences for financial security for premises and deferment of duty.  It is confusing for HMRC as well as the industry.”


    “There is now a range of significant proposals by HMRC for streamlining application processes, amendments to approvals and consistency of conditions, which is good stuff.”  Alan Powell says.  The ultimate aim is a “drinks factory” – a single authorization to produce all alcohol under duty suspension and under one compliance regime.  This would be extremely beneficial to the spirits sector, which has an array of requirements and has the only mandatory obligation for a premises guarantee above a certain limit.”

The BDA will be feeding its views to HMRC as the project develops.

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