To the Barricades, Comrade! The REDS Revolution in Excise

 

To misquote Marcellus in Act 1 Scene IV of “Hamlet”, something is rotten in the state of excise. Or so HM Revenue and Customs appear to believe. Dramatic reforms are apparently required, perhaps even revolution.

 

First, to summarise the context of these reforms, whether actual or proposed. Goods such as alcoholic products are subject to the payment of excise duty in the European Union Member State in which they are released onto the home market. They can, however, be stored duty suspended in Authorised Tax Warehouses – normally referred to as “bonded warehouses” or “bonds” - approved by and registered with HMRC. There is a common system of Authorised Tax Warehouses across the EU, allowing excise goods to be moved between warehouses and across international borders under duty suspension. Both sending and receiving warehouses have to be approved by the proper authorities within their own countries both by regime (for example, excise duties) and by type of goods (for example, alcohol or tobacco). Certain financial bonds are required. Warehouses must have a “holding guarantee” (also known as a “premises guarantee”) to ensure that the duty is safeguarded should excise goods go missing. Where goods are moved between warehouses, a “movement guarantee” must be in place, which HMRC require a party to the movement of duty suspended excise goods – being either the owner of the goods, or the excise bonded warehouse, or the haulier - to provide. The movement guarantee is intended to safeguard the revenue at risk from alleged fraud within the duty suspended excise regime by satisfactorily covering any potential liability to excise duty in individual movements of goods. Further, the goods must be accompanied by an Accompanying Administrative Document (“AAD”) showing the required details of the movement, required to ensure that the movement has been properly discharged. Those who deal in excise duty suspended goods (termed “WOWGR traders” after the name of the relevant excise regulations) have to be authorised by HMRC to do so.

 

For many years now, HMRC have turned a critical eye to this duty suspended excise regime. The Commissioners consider excise diversion fraud to be rife. In one version of diversion fraud, according to HMRC, consignments of excise goods (such as alcohol) intended for despatch from the UK to other EU Member States never reach their intended destination and are instead illegally diverted for sale in the home market, duty free, with the excise duty due to HMRC being defrauded. The fraud may also operate in reverse, in relation to excise goods despatched from another Member State to the UK but which apparently go missing after arrival in the UK.

 

Now comes the HMRC backlash. From 1^st April 2010, new VAT and excise wrongdoing penalties have been introduced 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.

 

A wrongdoing penalty will not be charged by HMRC where a reasonable excuse - being “an unforeseeable and exceptional event beyond your control” – for the relevant activity can be demonstrated. However, HMRC will not consider deliberate action to amount to a reasonable excuse.

 

The wrongdoing penalty will be calculated as a percentage of the lost revenue, ranging from a minimum (0%) through to a maximum (100%) depending on whether there is a reasonable excuse or the wrongdoing was non-deliberate, deliberate but not concealed or deliberate and concealed; and the extent to which the wrongdoing has been disclosed to HMRC.

 

It should be noted that where HMRC can identify that a company officer (a director or company secretary) caused a deliberate wrongdoing, such person will be personally liable for the payment of the penalty if there is evidence that they gained personally, or the company is insolvent or there are grounds to suspect that the company will become insolvent.

 

Another reform – now implemented – involves the overthrow of the “REDS”. It seems that the REDS are indeed dead, victims of the excise revolution. With effect from 1^st April 2010, the “Registered Excise Dealers and Shippers” arrangements have been replaced by an entirely new scheme to which HMRC Public Notice 203A refers, termed “Registered Consignees”, in accordance with Council Directive 2008/118/EC.

 

REDS were traders who had been approved and registered by HMRC to receive excise goods from other EU Member States and to account for the duty on duty suspended excise goods. Unlike WOWGR traders, REDS were not authorised to hold or despatch goods under duty suspension; they were required to account for duty owed immediately, on monthly returns on a duty deferment basis, normally at the point when the excise goods were received by them or by the importer on whose behalf they were acting. Now, they have been replaced by Registered Consignees who, like their predecessors the REDS, are revenue traders who are authorised by HMRC to receive and account for duty on duty suspended excise goods received from other Member States but who may not hold or despatch duty suspended goods. They may only receive duty suspended goods from Tax Warehouses or Registered Consignors in other Member States, not (for example) from UK warehousekeepers. A successful application for Registered Consignee status to be submitted to HMRC will require the applicant to have a place of business in the UK; to demonstrate a business need supported by a viable business plan; to be registered for VAT; to have no unspent convictions or adverse compliance history; and to hold a duty deferment account, for which a security is required.      

 

In addition, HMRC have several proposed reforms awaiting implementation. A review of excise financial securities was initiated last year. A Consultation Document was published in April 2009 and a Summary of Responses from interested parties in December 2009. The main proposals are as follows:

 

• That the authorised warehousekeeper (or the authorised warehousekeeper and the owner of the goods – the WOWGR trader) alone would be entitled to provide the movement guarantee to safeguard the revenue at risk in individual movements of duty suspended excise goods; an option which was not favoured by the majority of respondents.

 

• That conditions would be applied to restrict the use of guarantees. There was some support from respondents for the suggestion that where the movement guarantee is provided by the haulier, responsibility for the conduct of the movement should be limited to that party, thereby preventing the haulier from sub-contracting the transportation.

 

• That the level of guarantees should be increased to more accurately reflect the revenue at risk. Several respondents however considered that existing HMRC powers could be better utilised, for example by reducing guarantees for compliant traders; introducing procedures to monitor the level of liability against any one guarantee; and ensuring that minimum guarantees are not available to non-compliant traders or new businesses.

 

Furthermore, a consultation on “Excise Modernisation and Compliance Checks” has also been undertaken, concerned with HMRC’s powers, deterrents and safeguards in relation to compliance within excise regimes. The consultation period ended on 3rd March 2010. Subject to ministerial agreement, the proposals set out in the “Consultation and Response Document” will be included in the Finance Bill 2010. Draft clauses will be published in time for comment, with a view to implementation on 1st April 2011.

 

The proposals include:

 

• Extending powers to enable HMRC to inspect documents in order to check the provenance of goods (currently, HMRC Excise Officers have the power to inspect goods alone and not documentation, so that a joint visit will often be conducted with a VAT Officer who holds such powers). Immediate inspection of documentation is envisaged. Additionally, HMRC maintain the right to undertake unannounced visits.

 

• Introducing a new power to seek information from third parties such as financial institutions, landlords and hauliers. The request would be required to be in writing and to be authorised by a tribunal.

 

• Establishing fixed penalties in circumstances where a visit has been authorised by a tribunal but entry is refused; where a person deliberately obstructs an Officer in the course of an inspection; and for failure to comply with information requests.

 

• Alignment of the time limits for raising excise duty assessments with those within VAT legislation, to four years and twenty years (where the loss of excise duty is deliberate or where there is a failure to notify).

 

• Extending joint and several liability excise duty assessments - where the trader knew or had reasonable grounds to suspect that the excise duty on a supply, or any previous or subsequent supply, of goods would go unpaid to HMRC - to circumstances where alcohol is purchased at a price which would be economically unsustainable if UK excise duty had been paid.

 

• HMRC intend to explore the benefits that may arise from passing information about excise wrongdoing to other relevant UK regulatory authorities, to inform the assessment by such authorities of an individual’s fitness to hold a relevant licence (for example, the road hauliers’ association).

 

One of the most far-reaching reforms, however, is likely to be the introduction of the “Excise Movement and Control System” (“EMCS” – yet another acronym, as beloved in the excise world as in Soviet Russia!) As with the excise wrongdoing penalties, EMCS was implemented on 1^st April 2010. It is an electronic system for recording and validating all movements of duty suspended excise goods within the EU, replacing the system whereby a paper AAD accompanies all movements. Instead of a paper AAD, an electronic record (an “e-AD”) must be raised on EMCS and is automatically transmitted to the destination Tax Warehouse. No doubt, HMRC hope that the implementation of EMCS will drastically reduce the alleged incidence of the same paper AAD being used by fraudsters to accompany multiple identical loads of alcohol, all but one of which are then diverted for sale in the UK home market with the excise duty evaded.

 

So there it is. Excise traders of the world, unite! You have nothing to lose but your AADs….

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