20/07/10: “Our battles are directed, sir?” HMRC’s Renewed “Tackling Alcohol Fraud” Strategy
In considering HMRC’s renewed “Tackling Alcohol Fraud” strategy as a tax adviser who specialises in the field of excise, I am reminded of that wonderful exchange between Captain Blackadder and General Melchett in the episode ‘General Hospital’ from the “Blackadder Goes Forth” series, set during the First World War. Blackadder has been informed that a German spy is involved in stealing British battle plans.
General Melchett: “You look surprised, Blackadder.”
Captain Blackadder: “I certainly am, sir. I didn’t realise we had any battle plans.”
General Melchett: “Well, of course we have! How else do you think the battles are directed?”
Captain Blackadder: “Our battles are directed, sir?”
General Melchett: “Well of course they are, Blackadder, directed according to the Grand Plan.”
Captain Blackadder: “Would that be the plan to continue with total slaughter until everyone’s dead except Field Marshal Haig, Lady Haig and their tortoise, Alan?”
General Melchett: “Great Scott! Even you know it!”
I surmise that both excise duties practitioners and HMRC’s front-line Excise Officers may be surprised to learn that the vagaries of our battles in individual cases involving (for example) the seizure of allegedly undutied loads of spirits or the revocation of approvals to hold and move alcohol under duty suspension or the raising of assessments for excise duty running into hundreds of thousands of pounds, are somehow directed according to a ‘Grand Plan’. However, HMRC and their counterparts in the UK Border Agency (“UKBA”) have recently announced the renewal of their Grand Plan, the strategy to tackle alcohol fraud.
Having addressed World War One, another brief history lesson, this time on the evolution of alcohol fraud, at least in the aftermath of the era when ‘Gentlemen go by’ in the dead of night with ‘Brandy for the parson’, as portrayed in Rudyard Kipling’s “The Smugglers Song”. Alcohol fraud historically involved the smuggling of relatively small volumes of various alcoholic drinks into the UK, often by the generic ‘white van man’, for onward sale through pubs, clubs and cash and carrys or at car boot sales, with the duty due to HM Customs and Excise being evaded. However, since the introduction of the single market in 1993, organised criminal gangs have increasingly sought to exploit the systems introduced to facilitate the free movement of goods between EU Member States; and in commercial quantities. In the alcohol industry, this has resulted in the abuse of the duty suspended excise regime under which excise goods can be moved between registered warehouses in the EU and across international borders under duty suspension, until released for consumption onto the home market. In 2005, HMRC launched the “Tackling Alcohol Fraud” strategy, concentrating on duty suspended movements of spirits, identified at the time as the major problem in generating fraud. However, in the true nature of an arms race, the fraudsters have responded by increasingly targeting areas of lesser control, being movements of duty suspended consignments of beer and wine. Intended for despatch from the UK to another EU Member State, HMRC allege that such consignments never reach their intended destination and are instead illegally diverted for sale in the UK, duty free; or alternatively, that they may arrive on the near continent but are subsequently diverted back into the UK under the cover of false documentation.
HMRC have therefore renewed their alcohol fraud strategy to tackle the fraud across beer, wine and spirits; a fraud which costs an estimated £1 billion a year in lost duty. The strategy is now in operation across HMRC and UKBA. It proposes to address fraud throughout the supply chains relating to the purchase and sale of alcoholic products, by cutting off the supply of illicit alcohol at source. HMRC will focus both on the organised criminal gangs which divert goods onto the UK market and infiltrate supply chains; and on those in the alcohol industry who either knowingly or recklessly source supplies of alcohol from fraudsters. Of course, wholesalers and retailers of alcohol who are innocently duped into purchasing illicit alcohol and are unaware of the source of the goods, are also likely to be drawn into HMRC’s attempts to detect and disrupt fraudulent supply chains. HMRC guidance indicates that a tax assessment to recover unpaid excise duty will be raised against a trader who has been unable to provide proof of purchase such as a valid VAT invoice or other evidence which allows HMRC to trace the provenance of the goods and verify that duty has been paid upon them.
HMRC’s renewed alcohol fraud strategy comprises three broad areas of activity:
- Working with legitimate businesses to secure supply chains free from fraud;
- Reviewing and amending the law where necessary to reduce opportunities for fraud and to ensure that Officers have the powers to deal robustly with the fraudsters; and
- Strengthening the operational response to the fraud through a centrally co-ordinated effort across HMRC and UKBA, involving for example challenging all applications to become a registered excise trader; reviewing extant licences and approvals where excise traders are suspected of facilitating fraud; investigating businesses and individuals across all taxes administered by HMRC and in conjunction with other Government departments and agencies both within the UK and across the EU; deterring wholesalers and retailers from sourcing alcohol from the illicit market by introducing a programme of unannounced visits; seeking to recover lost duty through the issue of winding up orders and the confiscation of assets; continuously reviewing HMRC’s programme of regulatory change and responding to changes in the threat to the duty suspended regime; and focussing operational activity on the perceived highest risk rather than on routine assurance.
The strategy is supported by new arrangements, penalties and assessment powers which enable HMRC to specify who is liable to pay lost duty, to recover such duty and to penalise those trading in illicit alcohol within fraudulent supply chains. New excise duty point provisions implemented the requirements of EU Directive 2008/118/EEC and became law in the UK from 1st April 2010 under the Excise Goods (Holding, Movement and Duty Point) Regulations 2010. Further, VAT and excise wrongdoing penalties were also introduced from 1st April 2010 under Schedule 41 of the Finance Act 2008. The excise wrongdoing penalties will be imposed by HMRC where a person:
- Handles goods on which excise duty has not been paid or deferred;
- Uses a product in a way that means more excise duty should have been paid; or
- Supplies a product at a lower rate of excise duty knowing that it will be used in a way that means a higher rate of excise duty should be paid.
These new penalties and powers represent the most recent of HMRC’s attempts to tighten the noose around the neck of the fraudulent alcohol trade. They follow on from the withdrawal of the drawback facility for duty paid on goods warehoused for export in June 2009. In addition, the requirement for duty to have been paid – rather than just guaranteed or secured – in the Member State of receipt prior to repayment of UK duty, came into effect from 1st April 2010; as did the introduction of the Excise Movement and Control System (“EMCS”), an EU-wide electronic system for recording and validating all movements of duty suspended excise goods, replacing the system whereby a paper Accompanying Administrative Document was required for all movements.
In simple terms, the effect of these new provisions is that HMRC can recover duty from anyone found holding excise goods which have not had duty paid on them previously, even where the goods have now been released onto the UK market for wholesale or retail. Furthermore, HMRC can also issue a penalty where there is evidence of wrongdoing; and seize the goods.
It may be helpful at this stage to summarise when an excise duty point arises so that UK excise duty becomes due for payment:
- At the point of production or importation into the UK, unless the excise goods are placed into excise duty suspension;
- When the goods leave an excise duty suspension regime, either legitimately (for example, on release from an excise bonded warehouse for sale on the UK market on payment of UK duty) or illegitimately (without payment of duty); or
- When the goods are held outside an excise duty suspension regime and UK excise duty has not been paid, relieved, remitted or deferred under a duty deferment arrangement.
So, what can a trader do to avoid sourcing goods in relation to which excise duty has been evaded? HMRC guidance suggests that a trader should avoid buying goods from any supplier about whom he/she has suspicions. As so often in HMRC matters, appropriate due diligence undertaken upon business partners would appear to be key. HMRC guidance provides the following examples of possible indicators that excise duty may have been evaded: supplies offered via unsolicited e-mails or fliers; lack of detail about the identity of the supplier; goods offered at unfeasibly low prices; a supplier who insists on dealing in cash; the absence of a valid purchase invoice; and the absence of duty stamps on alcoholic spirits or fiscal marks on cigarettes and hand-rolling tobacco.
In renewing the strategy, HMRC are keen to stress that a prime motive is to protect the livelihood of legitimate businesses and to assist them in competing within the alcohol industry. A cynic might say that seeking to plug a gap in public revenues during a time of huge Government debt may be more of a motivational factor. In any event, battle has been well and truly joined. Since 2005, HMRC have seized nearly 15 million litres of alcohol with a taxable value of in excess of £33 million; and issued tax assessments for more than £175 million of evaded excise duty. Recent HMRC guidance talks of the successful prosecution of individuals involved in a wine and tobacco smuggling ring; a joint operation with the Police and Trading Standards in relation to counterfeit spirits; and the revocation of 45 approvals to hold and move alcohol in duty suspension during the last year.
Quite how the application of HMRC’s strategy will ultimately play out remains to be seen. HMRC should tread carefully. These are highly draconian and invasive powers and HMRC are by no means infallible. If the Grand Plan goes wrong, it could backfire on them spectacularly. In February 2010, HMRC detained and subsequently seized £1.5 million worth of alcohol – amounting to some 40% of the total stock held – at the Millennium Cash and Carry in Barking, London, on the ground that excise duty had not been paid on the relevant goods. A director of the business described the HMRC suspicions with regard to the detained stock as nothing more than a “hunch”. At a High Court hearing in May, the Judge agreed. HMRC were forced to concede that excise duty had indeed been paid on the goods; and have been ordered to return the seized stock and to pay in excess of £150,000 in legal costs. HMRC now face an action for damages arising from the significant loss of business, damage to the business’ reputation and the laying off of staff.
Of course, for poor Captain Blackadder and his colleagues in the trenches of northern France in 1917, Captain Darling, Lieutenant George and Private Baldrick, the Grand Plan ultimately doomed them to a sad demise having ‘gone over the top’ in yet another pointless attack.
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