Bulletins

1 Nov 2024: BDA achieves Repeal of Spirits Duty Stamps

After intense lobbying by the BDA, the burdensome and unnecessary Spirits Duty Stamps Scheme is to be abolished. The Budget of 30 November 2024 states “The Alcohol Duty Stamps Scheme will end following a review by HMRC. The government will introduce legislation in Finance Bill 2024-25 to end the Scheme from 1 May 2025.” (See https://www.gov.uk/government/publications/closing-the-alcohol-duty-stamps-scheme/end-of-the-alcohol-duty-stamps-scheme).

The abolition of the scheme was announced in March 2024 by the previous administration, and the Budget confirms that the change will go ahead. This is excellent news for the industry, which has suffered immensely for 18 years due to HMRC’s inconsistent and frequently wrong interpretation of this spurious and ill-conceived legislation.

The Budget document also briefly states that “The government will consult with industry to improve the Spirits Drinks Verification Scheme (SDVS) and make an investment of up to £5 million to support the SDVS.” There is no further information about this consultation, but the cost of the scheme and the bureaucracy involved is a concern for smaller businesses. We look forward to the consultation.

HMRC news – WOWGR, Deferment Guarantees and Due Diligence

24 September 2024 - HMRC circulated new updates to industry via their "postcard" medium. The important legal and policy material is copied below

WOWGR reform - A Ministerial submission has been sent to XST (Treasury minister excise matters) asking for agreement to take forward legislation for reform of WOWGR. We’re expecting a read out before the end of September and we’ll update stakeholders with the XST response.”

Presumably, "reform" means retention of Warehousekeeper registration and repeal of the owners in warehouse part, per HMRC's "preferred option" – and the only option in the view of the BDA.

Excise Movement Guarantees - Internal and external engagement continuing on policy change proposal – we’ll update stakeholders shortly on next steps.”

This relates to proposal (actually need) for the option of excise warehousekeepers not to provide the EMCS movement guarantee for UK movements to other tax warehouses, available already under regulation 39 of the HMDP 2010 and already (and always) applied to “production” tax warehouses. Commercial assessment of risk v cost will be the key factor for SMEs. 3PL warehousekeepers may still require the transporter to provide the guarantee to defray risk and is sensible. Any irregularity in the course of the movement is with the person providing the guarantee (or the warehousekeeper of dispatch if no guarantee is provided) regardless of culpability.

Due Diligence - Policy and operational colleagues held a workshop on 28th August to discuss and agree improvements to the application of Due Diligence for HMRC and excise businesses. Next steps will be to take the proposal to the Alcohol Delivery Group for agreement before we liaise with excise businesses via JECG.

As the BDA has submitted many times, HMRC needs to ensure their staff understand that Due Diligence is a risk-based procedure for mitigation of risk (if any) in a business’s specific supply chain, instead of the mechanistic checklist they invariably impose, which disregards any consideration of risk.

Nothing further has been said about repeal of duty stamps law (announced in the March Budget). The BDA has requested an update.

“Drinks Factory” regulations – draft Excise Notice

The BDA is a member of the Industry Working Group (IWG) with which HMRC has consulted on the draft regulations, regarding Excise Notice and Guidance for the forthcoming Unified Alcohol Products Producer Approval (APPA) regime. This is to take effect from February into March 2025. The unified regime is colloquially known as the “drinks factory”.

The IWG met with HMRC to discuss and consider the draft Notice/guidance on 6 July 2024. A consultation document was issued by HMRC the same day, which requires responses from IWG members by 30 August - a very tight deadline. The consultation is embargoed, being restricted to IWG representatives.

The simplification and unification of the alcohol production regimes is welcome and to be commended although the BDA recognises that it is no easy task to combine so much in the draft notice.

As usual, and inevitably, there is devil in the detail. The BDA’s response was sent to HMRC and IWG members on 11 August with a recommendation that there be a further full meeting to discuss industry responses. It is vital that the new APPA Excise Notice is both ready and effective for the commencement of the new “drinks factory” regime early next year.

UK alcohol production - unified excise drinks factory - on target for March 2025

The timeline for migration of approved alcohol producers from existing licences/approvals to the single producer approval was discussed at the meeting of the Industry Working Group (IWG) with HMRC on 23 May 2024. In brief, HMRC anticipates the new regime to be in effect 1 March 2025. HMRC will automatically migrate alcohol producers to the new regime so that existing affected businesses will not have to do anything. Industry attendees asked if there could be “look up/check” period after the approvals are issued, which HMRC will consider.

HMRC also confirmed that spirits producers who currently operate in excise warehouses (such as rectifying and compounding gin, spiced rum, vermouths etc) will be captured in this exercise. It may nevertheless be prudent to check details on any new approval document in due course.

HMRC said there are circa 5,000 alcohol producers currently approved or registered, but because no uniform application process has been in place (often details are on hand-written on supporting paperwork), the migration to an ERP platform is being performed manually. HMRC indicated this is going well and all migration is geared for completion by end of February 2025 for the new approvals to be in place for the new “drinks factory” brave new world.

The announcement of a general election for 4 July will not affect the mechanics of the process carrying on under pre-election purdah.

UK Budget 6th March 2024 - Spirits duty stamps to be abolished

Today's Budget Policy Paper “Tax Simplification” paragraph 6.3 states:

Alcohol Duty Stamps Scheme – The government will close the Alcohol Duty Stamps Scheme following a review by HMRC. The government will publish legislation later in the year for an orderly wind-down of the Scheme.

This announcement follows three years of intense lobbying for repeal of the scheme by BDA founder Alan Powell and HMRC’s consultation of December 2022.

The scheme was of no value as a purported anti-duty fraud measure and flawed at its inception since there was no material spirits duty fraud to combat. Abolition of the scheme will relieve burdens on the industry and risk of severe sanctions for any non-compliance.

2nd Feb 2024

Repeal of UK law to distil gin and other compounded spirits

The requirement to be licensed by HMRC to make gin or any other rectified or compounded spirits (e.g. spiced rum) has been repealed as expected since 1 August 2023 and confirmed to the British Distillers Alliance 2 February 2024.

The Finance (No 2) Act 2023 repealed the Alcoholic Liquor Duties Act 1979 (ALDA) but some parts of ALDA for licence and approvals to produce alcohol have been kept alive in a “zombified” state by bridging legislation, until section 82 of the FA (No 2) Act 2023 and regulations made under section 83 of that Act to approve such production, are enacted by HMRC.

Technically, section 18 of ALDA was not "zombified" — and is now fully repealed — so there is no longer a requirement to hold a licence to rectify and compound spirits or to make entry of rooms and equipment per regulation 7(1) of the Spirits Regulations 1991.

HMRC Policy informed us: “…the requirement to hold a licence to carry out the rectifying and compounding of spirits was removed as part of the 1 August 2023 alcohol reforms. For anyone rectifying or compounding duty paid spirits (with no change to the duty liability of the spirits as a result of that rectifying or compounding), then there is no longer a requirement to hold a licence from HMRC.

If, as a result of, the compounding and rectifying there is an increase in duty that would be payable if it had been carried out before the duty point, it can only be done in an excise warehouse (or in future on approved alcohol premises). …Once the new alcohol approvals go live, rectifying and compounding with duty suspended spirits will be possible on approved alcohol premises” (i.e. not in an excise warehouse – AP).

We have asked that section 15 of Notice 39 be amended because it erroneously still states that a licence and entry are required for rectification and compounding of spirits.

28th Oct 2023

WOWGR – Have Your Say to HMRC

On 26 October 2023, sent a questionnaire/consultation to many WOWGR-registered businesses and trade bodies. They say:

“… in March 2022, HMRC announced a review of The Warehousekeepers & Owners of Warehoused Goods Regulations (WOWGR) 1999. Following feedback from industry, HMRC is in the process of reviewing WOWGR as part of its programme of excise simplification and modernisation.

As part of this review and after engaging with key stakeholders, we are developing proposals on how the WOWGR requirements could be reformed. We would like to take views from a wide group of excise stakeholders, including businesses registered with HMRC under the WOWGR provisions. 

We are keen to hear from as many affected businesses as possible via a survey that will be live until 29 November 2023.”

This is good to hear and at last some further progress on what is to be hoped will be repeal of the requirement for owners of spirits and beer in a third party excise to be registered with HMRC. Such remains HMRC’s “preferred option” as was repeated at the Joint Excise Consultancy Group (JECG) meeting of 4 October 2023.

Several questions relate to the alcohol excise anti-fraud due diligence condition. In that context question 10 states: “Do you have any suggestions on how the current due diligence regulations could be strengthened?”

It is really important to make the point that there are no due diligence regulations – this is not pedantry; rather it is an important matter of law.

Due diligence is a condition set out in a public notice (initially Section 10 of Notice 196) comprising four principles which were determined by the First Tier Tribunal in the Safe Cellars Ltd v HMRC [2017] UKFTT 78 (TC) at paragraph 163 as follows:

(1) to assess the risk of alcohol fraud.

(2) to make "reasonable and proportionate" checks.

(3) procedures to take "effective mitigating action" where a risk is identified.

(4) To document what is done.

Paragraph 164 of the decision summarises:

These requirements are not the same as saying that the trader must take such steps as HMRC considers should be taken or as HMRC consider reasonable. If the trader identifies the risks, makes reasonable and proportionate checks, makes a reasonable assessment, and takes effective mitigating steps in the light of that assessment, it satisfies the due diligence requirements.

There are no regulations, just the principles to be observed. BDA and other Industry groups frequently report that HMRC’s officers do not appear to understand these principles or fail to apply them to any meaningful degree. HMRC has now agreed to convene a dedicated JECG on this matter to try to understand industry concerns.

In further reference to question 10, if due diligence were to be applied correctly by any relevant revenue trader, the condition should suffice as it stands and per the HMRC internal manual. It need not be “strengthened”. Whether WOWGR for owners exists or note, due diligence must be carried out anyway on the supply chain. Such diligence requires appropriate, reasonable and proportionate application of the principles. It is not a checklist or a counsel of perfection.

This is a good chance – per HMRC’s invitation – to have your say. If you require a questionnaire, please apply via our contact details.

29 July 2023

Alcohol excise duty changes from 1 August 2023 – swingeing tax increases and discrimination against small spirits producers

From 1 August 2023, alcohol duty rates will increase by 10% — a huge rise that will impact on spirits producers who face the decision to try to absorb some or all of the duty (which becomes a tax on the producer) or pass on most of the tax which, with VAT also added, would lead to about £1 a bottle increase for the consumer. Retained case law and economic theory tells us that excise duty is a tax on the consumer but that cuts no ice in the marketplace. The likelihood is that the producer will bear at least some of the “incidence of the tax”, applying further pressure to the business as another added (and unfair) cost.

At the same time, an alcohol duty structure and duty rates will replace that of the Alcoholic Liquor Duties Act 1979 (ALDA). To be scrupulously fair to the Government, and leaving aside the continued preferential treatment of “plain” cider, under the new structure there will be equivalence of excise duty based on the alcohol content of all products within three of the four main duty bands to be introduced. In the “mid” duty band of 3.5% abv to 8.5% abv, beer duty will be slightly lower than other products, but spirits will have almost equal treatment. Under ALDA, spirits had one “linear” rate of duty applied, so there was no “reduced rate” for lower strength spirits products (such as “shots” or RTDs). This will change in August, but spirits will effectively still bear the highest duty rate at strengths of 22% abv and greater, which means whisky, gin, vodka, rum etc., at minimum legal strength will continue to endure fiscal discrimination.

Additionally frustrating and disappointing for small spirits producers is that there is no reduced rate for any products of a strength above 8.5% abv under the scheme for small producers’ relief (SPR). The 8.5% abv “ceiling” in the new law therefore excludes small spirits producers from most of the benefits applicable to smaller brewers and cider makers, many of which are quite substantial enterprises. HM Treasury ignored the representations made by the BDA and others for “full” SPR for spirits, but instead have adopted a dogmatic position that higher-strength alcohol drinks must be taxed at full strength on health grounds, regardless of other factors that ought to be considered for smaller scale spirits production. The BDA became aware of other Treasury grounds for excluding higher-strength products from SPR, which are shallow at best, and we have rebutted them, to no effect. Many BDA members have written letters to their MPs to send on to the Treasury but all the replies received are templates of HMT “spin” which serve to deflect the omission of SPR whilst being self-congratulatory on smaller points.

The new alcohol duty structure is in truth a curate’s egg but sadly few parts of it “are good”.

HMT Budget 2023 - proposed alcohol duty changes 1 August 2023

In the Chancellor’s Spring Budget of 15 March 2023, it was announced that the rates of duty of all alcoholic products produced in, or imported into, the UK will increase in line with RPI. Draught Relief (i.e. reduction from the base rate for product in large containers) will increase from 5% to 9.2% for beer and cider draught products and from 20% to 23% for wine, spirits-based and other fermented draught products. These changes will take effect from 1 August 2023.

The full HMT publication is linked here:

https://www.gov.uk/government/publications/changes-to-alcohol-duty-rates/alcohol-duty-rate-changes

In addition, a brief status report was given about the progress of the Alcohol Duty Review:

“The government will legislate to make changes to the duty structure for alcoholic products, creating standardised tax bands based on alcohol by volume. The government will also introduce two new reliefs and transitional arrangements for certain wine products. These changes will take effect from 1 August 2023. HMRC will also take forward plans to harmonise the approval, return and payment processes for domestic producers of alcoholic products. These changes are scheduled to take effect from late 2024 with the introduction of the new digital system.”

19th December 2022

HM Treasury confirms alcohol duty freeze until August 2023

On 19 December 2022, HM Treasury wrote to the industry to say:

“Today the Exchequer Secretary made a statement to the House of Commons to announce that the freeze to UK alcohol duty rates has been extended by six months to 1 August 2023.

Whilst new duty rates typically come in each year on 1 February, the Minister has confirmed that the decision on the future duty rates from 1 August 2023 will be announced at Spring Budget 2023. This means that the duty rates from 1 August 2023 remain under consideration, but any changes to duty rates will align with the date the reforms for the alcohol duty system are due to be implemented. This decision has been made to provide businesses with certainty as they head into the Christmas period and recognising that they face a challenging few months ahead.

We would like to thank you for your ongoing engagement with us."

This is welcome news for hard-pressed industry facing uncertainty about duty rates since October.

1st October, 2022

Repeal of WOWGR – HMRC review conclusion

At the JATCG meeting on 28 October 2022, HMRC’s long-awaited review of the Warehousekeeper and Owners of Warehoused Goods Regulations 1999 (WOWGR) was presented and options under consideration were reiterated. HMRC’s preference is to repeal WOWGR, which is the course that has been urged for two years by the BDA as the only realistic and practical measure.

In summary, there was no option to do nothing, nor, for legal and practical reasons, would piecemeal or amending measures be satisfactory. In particular, HMRC recognises that the Regulations are in conflict with retained EU law in respect of duty points created for a breach of WOWGR but where the goods subject to that breach remain securely in the warehouse. HMRC also reported that their lawyers had identified uncertainty about when an investment in spirits held in cask in warehouse, constituted a “revenue trade” and whether WOWGR registration would be necessary. This requires consideration in detail by HMRC of each specific case.

For more than two years, the BDA has raised with HMRC not only the above problems and all other grounds for repeal of WOWGR, but also, the legitimacy of its very existence, including the inconsistency of excluding from the WOWGR provisions more than half of the excise products that may be warehoused.

Accordingly, HMRC’s preferred option was stated to be “Revoke all WOWGR legislation so it no longer applies. This will mean that the Owner and Duty Representative approvals would no longer be required, however the warehousekeeper approval would remain but the duty points and forfeiture provisions would no longer apply.” Legally, the warehousekeeper would need to be authorised and registered, but that would be all.

The measure will remove significant burdens from industry and eliminate waste of resources by HMRC on matters that are of no practical utility and will facilitate the government’s imperative for regulatory simplification and removal of red tape.

HMRC’s preferred option was supported by the industry, including third party warehousekeepers, who already operate effective compliance and due diligence. HMRC will only require reasonable and proportionate conditions to be applied by warehousekeepers.

HMRC’s programme for change (headed “Forward Look” in the presentation), will involve legal advice/drafting provisions and ministerial clearance as well as external stakeholder involvement, in which the BDA will participate and provide input. The necessary changes are intended to take effect in 2023.

This is excellent news for the entire industry.

1st September, 2022

Delivery Order for transfer of spirits in warehouse – repeal of law

Further to the Bulletin item of 27 August (below) concerning sales of goods in excise warehouse, an additional review of the original version of the Alcoholic Liquor Duties Act 1979 (ALDA) seems to explain the “convention” of the Delivery Order for transfer of spirits in an excise warehouse.

Section 32 of ALDA, headed “Restriction on transfer of British spirits in warehouse” stated:

(2) Spirits manufactured in the United Kingdom chargeable with duty which has not been paid which are in any warehouse other than a distiller's warehouse shall not be transferred into the name of a purchaser until the purchaser produces to the officer in charge of the warehouse a written order for the delivery of the spirits signed by the person in whose name they are warehoused and countersigned by the occupier of the warehouse or a servant of his acting for him at the warehouse.

This rather archaic provision — written when HMCE had officers permanently physically present in distilleries and warehouses — requires the preparation of a “delivery order” to be handed over (“produced”) to the officer (sometimes a team of officers) assigned to the warehouse to notify the transfer of ownership.

The law prescribing delivery notes in section 32 of ALDA was repealed by the Finance Act 2006 ss5(1)(g), 178, Sch 26, Pt I(I). This means there is no longer a legal requirement for the delivery note to be raised for transfer of ownership. In 2006, Parliament intended expressly to revoke the requirement and other archaic provisions of ALDA, under the headline of section 5 of the FA 2006: “Repeal of provisions of ALDA 1979 of no practical utility etc”.

The purpose in removing from law of the need for a Delivery Order was because its prescribed format and procedure was inconsistent with the change of philosophy of control for excise by HMRC under the Excise and Inland Customs (EICS) imperative. Under that control philosophy, HMRC commits to focus on systems-based control whereby HMCE/HMRC uses traders’ own records to control the revenue akin to VAT principles.

Accordingly, in order that third party warehousekeepers can keep track of owners and changes of ownership of goods in their warehouses, HMRC now states in Notice 197 at paragraph 8.2:

Before making any sale you, as the current owner of the goods, should:

contact HMRC’s excise liaison office and ask for confirmation of the purchaser’s registration
inform the warehousekeeper that the goods are to be sold and give details of the purchaser’s registration

In terms of buying the goods, Notice 197 paragraph 8.3 states,

Before making any purchase, you should:

contact HMRC’s excise liaison office and ask for confirmation of the seller’s registration
inform the warehousekeeper that the goods are to be purchased and give details of your registration to the warehousekeeper.

That is all that is required by HMRC in law; the above passage is effectively a Direction HMRC has made in a public notice under the delegated powers of regulation 7(1) of the Excise Warehousing (Etc) Regulations 1988 (EWER).

A format equivalent to the Delivery Order may be used to inform the warehousekeeper of the transfer of ownership per paragraphs 8.2 and 8.3 of Notice 197, but it is no longer prescribed by law, nor is any other method to inform the warehousekeeper of the transfer a lesser standard. There must always be a clear audit trail of the ownership (and transfer of ownership) to the warehousekeeper so that a record may be maintained per regulation 21(1) and Schedule 2, item (n) of EWER.

27th August, 2022

Ownership and sales of goods in excise warehouses

The subject of ownership and sales of spirits in excise warehouse is one that is frequently referred to the BDA for clarification. The law — and HMRC’s requirements — are quite simple at heart but it may be helpful to review the fundamental provisions that govern ownership and the recording of transfer of title of goods in duty suspension.

All excise goods can be subject to duty suspension in an excise warehouse (commonly called “bonded warehouses”), these products being hydrocarbon oils (petrol, diesel and biofuels), tobacco products, spirits, beer, wine, fortified wine and all other fermented alcohol products. Excise warehouses may be “privately” operated or offered as a 3PL service (or in combination).

Goods can be traded freely in an excise warehouse, as confirmed in HMRC’s Notice 197 which states at paragraph 8.1 “Owners of duty-suspended excise goods held in a warehouse may sell their goods in duty suspension at any time”.

For revenue control purposes, warehousekeepers are required to keep track of goods owned by third parties in their warehouses. Specifically, under the core Excise Warehousing (Etc) Regulations 1988 (EWER), warehousekeepers have to keep records of “the name and address of proprietors” of all goods held in their warehouses and “changes of proprietorship” (regulation 21(1) and Schedule 2, item (n) of EWER). Under the Customs and Excise Management Act 1979 section(1) a “proprietor” includes the sub-set of “owner” with the embedded characteristic of someone possessed of or beneficially interested in the goods. Curiously, where the limited range of excise goods are subject to the Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (WOWGR), the term “proprietor” is eschewed — the term “owner” of the goods is instead used throughout.

In order that third party warehousekeepers can keep track of owners and changes of ownership of goods in their warehouses, HMRC states in Notice 197 at paragraph 8.2:

Before making any sale you, as the current owner of the goods, should:

contact HMRC’s excise liaison office and ask for confirmation of the purchaser’s registration
inform the warehousekeeper that the goods are to be sold and give details of the purchaser’s registration

In terms of buying the goods, Notice 197 paragraph 8.3 states:

Before making any purchase, you should:

contact HMRC’s excise liaison office and ask for confirmation of the seller’s registration
inform the warehousekeeper that the goods are to be purchased and give details of your registration to the warehousekeeper.

It should be noted that only beer, spirits and tobacco products require owners to be registered with HMRC; nevertheless in all cases of changes of ownership, the buyer and seller are required by law to simply inform the warehousekeeper of the transaction. There is no prescribed method to do this.

Sometimes a joint document called a “delivery order” is drawn up between the parties to notify change of ownership in warehouse, which is convenient and often used for cask sales, but is not a formal document of proof of title. Many warehousekeepers we contacted had not heard of a delivery order and use commercial or other evidence of the change of ownership in the warehouse. The point is that any reasonable and clear notification of the change of ownership is sufficient to comply with the published requirements in Notice 197 to HMRC to inform of changes of “proprietorship” of goods held in an excise warehouse for the purposes of excise law. We are advised that legal title is subject to contract of sale and potentially consumer rights law.

It is also important to bear in mind that public warehousekeepers usually have no interest in the goods owned by third parties in their warehouses (or in changes of ownership or in physical duty-suspended movement of the goods). This is a point made repeatedly by the industry to HMRC. Indeed in the Memorandum of Understanding of 2007 between HMRC and the United Kingdom Warehousing Association it is stated at item 2 to at Annex III:

Both the UKWA and the Commissioners accept that in a high proportion of cases the warehousekeeper has no financial interest in the goods being moved under duty suspension nor care and control of those goods.

This was reiterated and recorded as an argument by the Claimant in the Seabrook Appeal Court decision (case ref [2019] EWCA Civ 1357) about “the nature of the businesses carried on by warehousekeepers who are essentially supplying ancillary services and operating on relatively low margins, when compared with the owners of excise goods.”

The warehousekeeper has obligation to HMRC in raising and maintaining accounts and records for audit and compliance purposes, but ownership and commercial transfer of title of the goods is a matter between buyer and seller.

1st June 2022

HMRC Policy change: removal of restrictions on a) storage time for Trade Facility Warehouses and b) removal of qualifying criteria for General Storage and Distribution warehouse approvals

Due to BDA lobbying of HMRC, and commencement of litigation on behalf of a member as a lead case, HMRC has removed the storage time restriction for Trade Facility (TF) policy warehouses for distillers’ own product held in an excise warehouse (e.g., spirits produced "from scratch" in a distiller's warehouse, or gin from ethyl alcohol "bought in”, etc).

HMRC has also removed the stockholding/throughput criteria from the General Storage and Distribution (GSD) warehouse policy. GSD approval will be considered on an individual business case and economic need basis.

These changes are formally promulgated by amendments to paragraphs 4.1 and 4.2 of Notice 196, with effect from 1 June 2022.

The restrictive “dwell time” policy has been a cause for concern and tribulation for such warehousekeepers for years due to its arbitrary and unnecessary abbreviation of duty suspension.

Third party warehoused goods in a TF warehouse will have a 90 day maximum period from the end of the last permitted operation in the TF warehouse (e.g., bottling, packing, etc). The BDA has written to HMRC with its members’ views that this time period may not be sufficient in some circumstances. Moreover, the 90 day "extension" may be further extended for reasonable cause or need — it is a matter of HMRC's discretion which must always be exercised reasonably. In any event, third party packers may consider applying to commute the type of approval they hold from TF to GSD, thus being "free" of any dwell time restriction for their customers’ goods.

26 April, 2022

HMRC review and consultation into the Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (WOWGR)

At the meeting of the Joint Alcohol and Tobacco Consultative Group (JATCG) of 21 March 2022, HMRC announced a Review of WOWGR. This was unexpected and has wide-reaching implications for the spirits industry and for beer in duty suspension.

HMRC’s presentation

HMRC stated that previous reviews of WOWGR were undertaken in 2002 and 2013.

HMRC recognizes that the law is inconsistent and caused problems, which may briefly be summarized as follows:

Only spirits, beer and tobacco products included in the scheme;
Oils (fuel) ownership excluded from the scheme;
Wine and made-wine (including flavoured ciders) excluded from the scheme.
Duty points created for errors/breaches of WOWGR (which are in breach of retained EU law — "Polihim") and cause immense difficulty to resolve;
Problems with identification of ownership for the warehousekeeper.

HMRC say the review will help it adopt an effective policy and ensure any future changes to WOWGR are approached clearly and consistently, so are developing a policy review document detailing the:

Policy Summary
Data on the number of WOWGR approvals and revocations
Rationale behind the possible changes of the WOWGR policy
Potential options — setting out the advantages, disadvantages, impacts and issues to address.

HMRC hold no fixed or preferred view of change. Potential changes will be shared with stakeholders to assess the need/desire for any change. HMRC’s indicated options appear to be:

Do nothing;
Complete revocation of WOWGR registration of owners;
Remove investment in product owned in warehouse (mainly spirits) as a “revenue trade”;
Remove cask/bulk spirits from the ownership scheme;
Alternative may be removal of scheme and instead to register transporters

HMRC's timeline, noted below, is tight and had commenced by the JATCG meeting:

Initial review of the current policy: Feb – March 22

Data gathering on WOWGR and feedback analysis
Development of options to pursue
High level risks and wider impacts of each option.

Discovery: April – June 22

Wider HMG sessions on proposals
Further engagement with the trade on the options
Delivery timelines
Option finalised

Delivery: July 22 onwards

Project coordination

BDA submission — summary

The rationale for Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (WOWGR) is set out in the explanatory notes to the regulations, stating:

The provisions in respect of owners of goods held in excise warehouses (and their duty representatives) enable the Commissioners to identify those persons who hold duty suspended excise goods in warehousing facilities provided by third parties. (Emphasis added).

In fact, and as a matter of public record, the frauds that led to registration of owners were incited and orchestrated covertly by (as was) HMCE’s National Investigation Service (NIS). HMCE knew all the owners of goods and the transporters in order to arrest and prosecute them.

When HMRC stopped the fraud they were operating in 1998, all the fraud ceased immediately. Moreover, the implementation of WOWGR did not, nor could, achieve more than HMCE had already done by simply stopping the fraud 18 months previously. For that reason alone, the scheme, which has no basis in EU law, fails utterly to meet any measure of the principle of proportionality, that requires the UK to do no more than necessary to achieve the legitimate objective.

As HMRC recognizes, the law is inconsistent because oils (fuel) ownership is excluded from the scheme, as are wine and made-wine. It should be noted that cider is not excluded from WOWGR, but the duty on “plain cider” is very low and the UK alcohol market share miniscule. However, since most commercial cider is flavoured cider and therefore taxed as made-wine, flavoured cider is excluded from the scheme. Only beer and spirits are left as alcohol products within the scheme. The tax gap for spirits is practically nil, therefore only one alcohol product — beer — might justify being considered for retention.

Duty points are created for errors leading to non-compliance with WOWGR (which are in breach of retained EU law — “Polihim") and as a consequence of the scheme, there are growing problems with identification of ownership of cask spirits for the warehousekeeper.

Evaluation of options

The registration and authorization of excise warehousekeepers filled a gap (lacuna) in UK law to enable HMCE to formally authorize persons as warehousekeepers. Hitherto, only the warehouse premises were subject to approval by HMCE which was, in turn, deficient with regard to EU law (as retained in UK law). It is therefore necessary to maintain such registration.

In terms of registration of owners of goods in warehouse and duty representatives, the WOWGR scheme is riddled with inconsistencies, anomalies and breaches of retained EU law. Accordingly, HMRC does not realistically have an option to do nothing. The BDA’s position is as follows:

WOWGR has caused unintended problems for ownership of casks of spirits maturing in warehousekeepers’ approved premises. Therefore, there is a case for removal of cask spirits from the scheme, which would remove from the register a great many owners of goods in warehouse.
There is also a case with for removing the interpretation of investment in spirits in warehouse as a “revenue trade”. This would also remove large numbers of registered owners of goods in warehouse and could be in unison with removal of cask spirits from the scheme.
However, any “piecemeal” removal of such parts of the WOWGR scheme would leave little purpose in the regime remaining on the statute book, because there would be far more exclusions from WOWGR than products and activities remaining within its ratio.

Recommendation

It is urged that HMRC takes necessary steps to either:

amend the Warehousekeepers and Owners Of Warehoused Goods Regulations 1999 to repeal the parts requiring registration of owners and duty representatives; or
revoke the regulations entirely and replace with a short statutory instrument that continues to regulate the authorization of excise warehousekeepers.

The Alcohol Wholesale Registration Scheme (AWRS), which includes wine, made-wine, RTDs, flavoured cider, already comprehensively addresses any existing risk of alcohol duty fraud and due diligence is, in any case, part of the anti-fraud infrastructure for both duty suspension and duty-paid supply chains under AWRS.

October 31 2021

Budget: Autumn Statement

The Autumn Budget statement freezes all alcohol duties and states no legislative changes are intended for the next year.

HM Treasury’s Alcohol Duty Review follows the government’s calls for evidence from the industry last November. The government’s proposals are now out for consultation:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1028702/20211026_Alcohol_Duty_Review_Consultation_and_CFE_response.pdf

Confusion has arisen because the Chancellor's speech was not wholly clear or correct and the consultation document does not adequately communicate the main proposed changes. However, leaving aside reduced rates for large pack (casks of beer, cider, made-wine), everything is summarized at Table 4.B at page 31 of the consultation document

It is proposed by the government that in February 2023 there will be five alcohol strength bands to establish a rate for duty on products within each band. In four of these bands, the duty rate (an amount per litre of pure alcohol) is the same for all products within each respective band. The band for strengths 3.5 - 8.4% abv has exactly the same rate as that for wine, made-wine and spirits with a slightly reduced rate for beer and a very much reduced rate for ‘plain’ cider. Note that fruit cider is still to be treated as made-wine.

The proposed “1st band” is from 0 to 1.2% abv and is set at nil duty, but the definitions of all alcohol subject to taxation under section 1 of the Alcoholic Liquor Duties Act 1979, requires the products to exceed 1.2% before they “become” a taxable alcoholic product. Until they exceed 1.2% abv, they do not exist as an alcoholic product subject to ALDA and therefore are not subject to alcohol tax.

The BDA feels there should be only four bands and has written to HM Treasury with this suggestion.

Spirits duty rates

Spirits at “normal” strength (and which have to be a certain strength, e.g., whisky at 40% abv) will bear the highest of the five bands. However, the reduced rates will be attractive for RTDs made from spirits and also for stronger “shots” type drinks at, say, 15 - 22% abv. Many of these, (which at one time were subject to post-duty point dilution) are currently made as fortified made-wines from a neutralized ferment/spirits base, then flavoured. Since ethyl alcohol is cheaper than ferment/alcohol as a basic cost, producers are very likely to quickly switch to spirits as the base alcohol.

There is no justification given by the government for not including spirits producers as “craft” producers, thereby allowing them to benefit from a reduced rate at full strength. The reduced rates will apply to “craft” producers of spirits-based drinks below 8.5% abv. Therefore, an RTD made from spirits by a small producer would be eligible for the reduced rate, but this misses the point that the artisan sector is no less deserving of a reduced rate for spirits of any strength. Moreover, the main spirits brands at full strength will have the most cachet, not as a derivative RTD.

Administration and reform

In terms of administration, several sensible proposals have been made in the Condoc to simplify and rationalize licenses and approvals for all alcohol regimes: this is an on-going project within HMRC. Of particular interest is paragraph 5.14, which says:

“The requirement for rectifiers and compounders working with duty paid spirits to be licensed or approved will be removed under new system.”

This is long-overdue, not only because it is utterly pointless, but also should be removed for those operating on spirits in duty suspension (warehouse) as well. The law permits rectifying and compounding as a specific operation in warehouse, but does not require a licence to be held for that trade/operation. Therefore, a simple revocation of section 18 of the Alcoholic Liquor Duties Act (which requires a rectifier or compounder to be licensed by HMRC) would suffice.

Budget October 2021

Recycling bottles and containers - call for repeal of HMRC’s spirits duty stamps law

The British Distillers Alliance (BDA) has been inundated with requests from members for clarification of the law concerning re-filling of duty-stamped empty bottles. The law does not make clear where a stamp should be re-applied, and appears silent about stamped bottles that are re-filled at on-trade premises. There are potentially huge penalties for breach of the regulations including a fixed penalty of £250 per bottle even though the duty has been paid on the spirits (and the penalty is 30 times the duty on the spirits in the stamped bottle that has already been duty paid). The BDA has written several times to HMRC Policy officials over the past 12 months to discuss and seek clarification but has not had replies. Meanwhile, the industry is in panic they may get things wrong.

The law has not moved with the times and, at the least, requires amendment and clarification. That said, the simplest solution would be for the duty stamps scheme to be repealed entirely. There never was any spirits duty fraud of any statistical significance at the time the duty stamps scheme was mooted and the empirical data clearly bear this out. It appears HMCE (as was) erred in interpreting revenue receipts at the turn of the century but nevertheless in 2006 legislated for a scheme that the industry did not believe was necessary and, indeed, remains unnecessary and heavily burdensome.

23 February 2021

UK – EU excise movement procedures from 1 January 2021

Since 1 January 2021, the excise movement procedures for intra-EU movements between GB and EU Member States ceased. The procedures for what are (now) imports and exports of excise goods between the UK (GB) and EU (now Rest of World) already exist but many businesses have been wrong-footed.

The UK “switched off” the EU-wide Excise Movement and Control System – EMCS – at the end of 2020 (and gave notice this would happen). The UK has retained a domestic version of EMCS for duty-suspended movement of excise goods wholly within the UK. This takes movements as far as the port for exports (under EMCS).

There is an option for exporters to use customs transit/procedures which does not involve EMCS but HMRC’s Notice 197 section 13 (Exports of excise goods) commences (and majors) on the “EMCS” route. A brief summary of how goods should “move” under the “EMCS” route is set out below.

The GB tax warehousekeeper of dispatch must use the UK-only version of the Excise Movement Control system (EMCS) to initiate a movement (eAD) from a UK tax warehouse to UK port under cover of a UK movement guarantee. A declaration must be lodged for the export to the EU and an import declaration to be made (e.g. French or Dutch customs), with a customs procedure code for release of the goods to free circulation (customs-cleared), but subsequently under the control of the EU EMCS (excise duty suspension) from the port, to a tax warehouse within the EU. The movement from the UK is discharged when a Report of Export (IE 818) is received via EMCS from HMRC.

When the goods are customs-cleared in the EU, any further excise duty-suspended movement must be initiated on the EU EMCS by a Registered Consignor (Defined in Directive 2008/118/EC Article 4(10)) in the “recipient” Member State. Further, “another” moment guarantee must be in place to cover "the risks inherent in the movement" under the EU EMCS. The goods then move under cover of an eAD (with an ARC number) to a tax warehouse in the EU.

For movements involving Northern Ireland, see Notice 197 section 17.

The ”reverse” applies to all excise imports into the UK (GB) in effect. See Notice 197 section 7.

The UK has retained its own version of the EMCS, as explained above, but it has no relationship or interface with the EU EMCS.

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 [37]:

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.

BULLETINS

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29 July 2023

Alcohol excise duty changes from 1 August 2023 – swingeing tax increases and discrimination against small spirits producers

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