UKWA on alcohol fraud for 3PLS

October 27, 2014 by Kirsty Adams
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UKWA’s excise duty specialist, Alan Powell, considers the impact of HMRC’s new alcohol fraud measures on the third party storage sector.

Following consultation on the detail over the summer through the JAAT (and prior to that, formally in 2013) HMRC has issued new guidance anti-fraud Excise (alcohol) due diligence condition which will take effect from 1st November 2014.

As part of the introduction of this measure HMRC will be mailing this guidance together with a covering letter and a Q&A sheet, directly to all registered excise traders/members.

HMRC says that by 1st November the guidance will find its way into published regime guidance and carrying out due diligence will become a condition of excise registration/approval.

The due diligence condition applies to those businesses approved and registered by HMRC under Alcoholic Liquor Duties Act section 41A and Customs and Excise Management Act section 100G who deal in alcoholic liquor goods. This includes:

Breweries approved to trade under duty suspension arrangements
Registered Excise Warehousekeepers
Registered Owners of Goods (within an excise warehouse)
Registered Duty Representatives
Registered Commercial Importers
Temporary Registered Consignees
Registered Consignees
Registered consignors

All reasonable measures to tackle alcohol duty fraud are to be welcomed. The fraud that exists really hurts legitimate business and costs the taxpayer. The knock-on effect of the fraud is the harsher control regime for honest businesses, delays in approvals or variation to conditions of approval by HMRC and the application of what industry believes are often excessive conditions to approvals.

Warehousekeepers and Owners of Goods Regulations 1999 (WOWGR)

So what of the new condition? Warehousekeepers and all registered traders are authorised/approved/registered under CEMA s100G and regulations made under CEMA s100G and CEMA s100H, which includes the Warehousekeepers and Owners of Goods Regulations 1999 (WOWGR). In the case of warehousekeepers, under WOWGR regulation 17, “the approval and registration of every authorised warehousekeeper shall be subject to conditions and restrictions prescribed in a notice...”

So the “due diligence” imposition can be made in a relevant public notice as tertiary law. Like all impositions under WOWGR, any condition applied by HMRC must be reasonable.

I have said at JATCG meetings that the due diligence concept HMRC has “borrowed” from VAT doesn’t really have a parallel in excise duty. Furthermore, the EMCS (electronic movement system for excise goods) should itself validate and control movements – EMCS was pursued as the ideal by HMRC to fight fraud, though the system has not been successful thus far in this regard.

That said, due diligence will be operated by many excise businesses already and, in an environment where fraud is a prevalent risk, this is good practice. Further, it seems to me that if a warehousekeeper consigned product under duty-suspension that was illicitly diverted (even though a return of receipt was obtained under EMCS), the warehousekeeper’s proof of effective due diligence would reinforce the fact that the dispatching warehousekeeper could not be implicated in the diversion (ie the warehousekeeper did not know or have knowledge of the diversion and took all reasonable steps to guard against being involved by effective due diligence). This should provide extra protection against a joint and several liability for duty on diverted goods if the person providing the movement guarantee cannot be found to pay the duty (or can’t pay the duty).

Similarly, it is wise to have measures in place (due diligence) to avoid the risk of handling goods on which duty hasn’t been paid because of the savage sanctions that will be applied by HMRC. On that basis, the concept and effective operation of “due diligence” can actually “add value” if it makes people think about the implications of risk to business within excise supply chains and aids the fight against fraud.   

The due diligence requirement is also a more reasonable measure than some of HMRC’s other anti-fraud proposals and in particular the proposal for prohibition of duty-suspended movements of beer within the UK, so it’s all about the proportion.   

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