January excise changes should prompt due diligence shake-up

23 Dec 2020

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, writes Alan Powell, excise specialist and a member of the CIOT's Indirect Taxes Committee.

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 Excise Movement Control System (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 Alcohol Wholesale Registration Scheme (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]:

  1. 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.
  2. The movement is entered onto EMCS, and is known as “the cover load”.
  3. 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.
  4. 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.
  5. 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).
  6. 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.

Guest blog by Alan Powell, excise specialist and member of the CIOT's Indirect Taxes Committee
All guest blogs reflect the personal opinion of the author and not necessarily that of the CIOT.