Seizures of alcoholic goods - excise duty liabilities – exposure extends to tobacco and hydrocarbon oil products

Many businesses in the wine/beer trading sector have recently experienced severe difficulties, with HM Revenue and Customs (HMRC) imposing either onerous financial conditions on duty in suspense trading in alcoholic goods, or seizing alcoholic goods worth several hundred thousand pounds, on fairly thin (and definitely appealable) grounds.

We are also aware of bonded warehouse facilities being affected, with at least one the subject of a substantial excise duty enquiry by HMRC where its duty exposure is many millions of pounds.

The problem

A substantial amount of trading in alcoholic goods takes place ‘duty in suspense’, where goods can be moved to and from, and sometimes inside, the UK without payment of excise duty. This is normally payable when the goods leave tax warehouses for final consumption. Where the goods are being moved to another EU Member State, payment of UK excise duty is not applicable. However, often the goods are diverted from their EU destination for consumption in the UK without payment of the relevant duty and VAT.

Usually, the person responsible is the excise warehousekeeper or the haulier, who provide guarantees for the duty while in transit. Traders who buy goods for export where excise duty has already been paid can make what are known as ‘drawback’ claims, where HMRC will repay excise duty on production of evidence of duty payment and subsequent export.

However, where the actual time and place of diversion is unclear or not known, new excise legislation also allows HMRC to assess the holder of goods for excise duty even where these have been bought as ‘duty paid’. They are also empowered to levy penalties of up to 100% of the unpaid duty and to seize such goods. The definition of "holder" is very widely drawn and extends to persons who have had no part in the evasion of the duty and even persons whose only involvement is to own the premises where the goods are found.

While the onus is on the authorities to show that duty has not been paid, the owners of the goods can face months of uncertainty, an absolute loss of the goods and also an assessment for duty and VAT and penalties if they can produce such proof. Others involved can face claims from HMRC on the basis that they are jointly and severally liable for the duty.

Actions by the authorities

While instances of these problems are not currently widespread, there are clearly indicators that HMRC is paying closer attention to alleged duty fraud in the alcohol goods sector (particularly beer and wine), an area which has previously been of relatively little interest but which is gaining a higher profile in recent months, particularly since the introduction of the new Regulations.

iTax UK has advised in several cases where problems have occurred in this area.

• A trader was served by HMRC in October 2011 with a Direction that trading of excise goods (wine) could not take place under duty suspense, and he was obliged to pay duty and VAT on his sales. The grounds for the Direction were clearly flimsy, and HMRC were forced to retract the Direction when the case was analysed. The Direction was also served on the warehousekeeper, who reported that similar Directions had been issued to other customers
• A trader had all his stock seized in December 2011, to the value of £160,000, on the grounds that some were the subject of fraudulent ‘drawback’ claims by a third party. The rest of the goods were seized because the authorities thought they "probably" had the same provenance. The seizure of a large amount of goods unconnected to their original enquiry was clearly disproportionate, and this action has been appealed and is ongoing.
• Manufacturers of alcoholic goods have been warned in writing that HMRC consider that there is no legitimate market for certain goods and that such sales are being acquired by criminal gangs

Businesses affected by the new legislation

HMRC make it clear in their leaflet on the new issue, ‘New HMRC powers to recover unpaid Excise duty affecting wholesalers and retailers’ that the legislation affects alcoholic goods, tobacco products and mineral oils (petrol/diesel). Wholesalers and retailers are exposed to this kind of action; HMRC will seize goods even though they are specifically bought on ‘duty paid’ terms.

It should be noted that businesses which buy direct from manufacturers or through authorised distribution channels should have no problems in this area (although in some circumstances this cannot be ruled out entirely). However, wholesalers and retailers who buy from ‘grey market’ providers, and this practice is known to be widespread, are very exposed as they simply cannot tell whether the goods they buy through such channels are actually duty paid.

Other businesses involved in this sector and who may be exposed are those involved in the forwarding and warehousing of these goods.

Action required

Businesses who buy products through the grey market, or whose supply chains are not direct from the manufacturer or otherwise transparent should:

• review their procurement processes to try to ensure that their processes are not lacking in any way;
• carry out proper "know your customer/supplier" checks, including personal visits and stock identification procedures
• have robust internal challenge procedures to ensure that infected stock is not bought unwittingly;
• ensure that the appropriate policies and processes where goods are bought from non-standard sources are documented and properly recorded; and
• ensure that proper training is given to enable staff to identify and respond to transactions which may be out of the ordinary

Expert advice for businesses

iTax UK has advised many clients in this sector, and can advise on all of the above action points.

Tax fraud in the construction industry

In a little-noticed anti-fraud measure, HM Revenue and Customs are extending to the construction business many of the controversial anti-fraud measures they have used to try to stamp out VAT "missing trader" (or "MTIC") fraud in the mobile phone and computer chip trading sector.

The "MTIC" frauds worked by an importer acquiring goods free of VAT from elsewhere in Europe, selling them in the UK and pocketing the VAT charged. Buyers found that the taxman refused to repay VAT paid to their suppliers, even though there had been no contact with the real fraudster. This stance arises from several European Court of Justice decisions, which established that customers could be denied input VAT recovery if they "knew or should have known" that a fraud elsewhere in their supply chain would take place.

HMRC cite this principle in their leaflet "Use of Labour providers - advice on due diligence"[1][1], making clear their view that failure to carry out "appropriate" checks will be evidence that you knew or should have known of a fraud if you fail to carry out appropriate checks on labour providers. They have adopted the same procedures in the construction industry, amongst others, because a sub-contract labour supplier effectively acquires his labour “VAT-free”. The taxman will look to deny the main contractor the input VAT paid out if the sub-contractor goes missing or into liquidation and fails to pay the VAT due.

VAT case has huge implications for construction companies

“Tax doesn’t have to be taxing” – or so Moira Stuart would have us all believe. Readers in the real world, however, and particularly those in the building industry, will often have a different view of our tax system. A recent High Court decision on the VAT liability of contractors' services in the construction industry may have far-reaching implications, not just for this sector, but also for many other businesses which use independent contractors to provide services to consumers.

The decision related to the use by a loft conversion company (A1 Lofts Ltd) of independent contractors to provide specialist services - electricians, plumbers, builders, roofers, etc - in carrying out the actual loft conversion. A1 provided customer identification, pricing, project management and quality control functions. They then engaged individual contractors on the clients’ behalf to do the actual build.

The company claimed that its agreements with both contractors and householders entitled it to be treated as a project manager, and that it was only liable to account for VAT on the value of its own services. Unfortunately, HM Revenue and Customs claimed otherwise (at this point many readers sigh and mutter “no surprise there, then” under their breath). Their view was that A1 was a head contractor, and thus liable to account for VAT on the full value of the services provided by all the tradesmen. As is often the case, many of the smaller tradesmen were not registered for VAT, and thus the decision would have raised substantially the final price to the consumer. As an example, the price of a house extension costing £50,000 would be increased by about £3,000 if HMRC's ruling were to have been correct. One of the Revenue’s main planks was that consumer perception was paramount, and if the customer thought A1 was the principal, then that perception would have a knock-on effect on the VAT liability. The Tax Tribunal found in the Revenue’s favour. Fortunately, the High Court had different ideas. The judge’s decision made clear that the drafting of the contractor agreements, so long as they were not departed from, was critical in determining the VAT liability. The judge largely rejected HMRC's contentions that the services had to be channelled through A1. The case has now been sent back to the Tax Tribunal for a final decision on the basis laid out by the High Court. The final outcome may affect many other businesses which pull together different components (and individual suppliers/contractors) of the services they offer to customers. In the meantime, any businesses which operate in similar circumstances, or would consider doing so, should review their contracts and consider whether they can be improved to reduce the chances of HMRC mounting similar challenges to their own business.

George Kelly, of iTax UK LLP Tax can be contacted on 0151 287 9573

Dawn raids – what they mean and how to cope with them

Changes in the law

Last April (2009), HMRC introduced new powers to demand entry and production of records without a search warrant for companies thought to be cheating the taxman. Since then, a number of dramatic ‘dawn raids’ have hit the press and it has become apparent to many that cracking down on fraudsters or those with incorrect tax records is becoming a priority in today’s strained economic times.

These legislative changes allow the Inland Revenue half of HM Revenue and Customs access to business premises and trading records without prior notice. Raids are not an everyday occurrence; but one thing all tax and legal professionals with experience of such raids do agree on is that they can be devastating and frightening when they do happen. Many business people feel the effects long after the officials have departed. Remember, they are called dawn raids because they often take place in the early hours where the targets of the raids are most easily locatable - at their homes; a chilling reminder that it is not just office and business premises that may be ransacked by the taxman.

The new powers of entry and inspection allow HMRC to inspect business premises, demand copy documents and even require information to be given from third parties. They now also cover the “smaller” taxes like Insurance Premium Tax

The new rules also now mean that HMRC can go back a full 4 years to recover arrears of tax even where there is a genuine misunderstanding; the only good news here is that businesses can at least recover overpaid tax for a similar period.

Dealing with raids

George Kelly, Partner in charge of Tax Investigations at iTax UK LLP, says that these changes have led to an increase in instructions from clients wishing to review their tax raid strategies. But how exactly can companies do this, and what are the measures they can put in place to protect themselves whilst also complying with HMRC’s demands?

Investigations can be generated from several quarters:

• Tax officials referring suspicions to fraud investigation functions
• Internal whistle-blowing
• Disgruntled ex-employees
• Competition “tip-off” or complaint

Intrusive and aggressive unannounced visits by HMRC – the dawn raid of popular journalism – poses a sufficiently real risk for many businesses already to have detailed plans for how to cope with such occurrences. Recent experience, however, has shown that some of these do not reflect changes in the law, or fail to address precise risk areas. Others seen are too general and some actually give advice that is contrary to the law.

And not just them – although HMRC is the body which uses this tactic most frequently, a whole alphabet of regulatory bodies has access to business and domestic premises, many without the need for search warrants or advance notice – Serious Organised Crime Agency (SOCA), the Office of Fair Trading (OFT), the Serious Fraud Office (SFO), even the Office Europeen de Lutte Anti-Fraude (OLAF), the EU’s anti-fraud agency can turn up on your doorstep; the list goes on.

Solution

One way of looking at the steps needed to deal with this kind of event is to divide the phases of an investigation as follows:

• Preparation
• Containment
• Resolution

So, where the first area to look at is Preparation, consider the following actions:

• Boilerplate solutions may not be the most effective preparations. They need to be prepared with business-specific priorities and circumstances in mind. For instance, it is no use making the company secretary responsible for dealing with a raid if he is going to retire in six month’s time.
  • Analyse and evaluate the company’s risk profile
  • Prepare up to date, focussed, company-specific guidelines and checklists, covering premises, document retention and location, and personnel, and ensure these are reviewed periodically for accuracy, changes in the law and relevance
  • Devise and deliver training in understanding regulatory powers and dealing with practical events tailored to the company’s risk profile
  • Arrange role-play with affected company personnel
  • Appoint experienced, external advisers.

Then, Containment:

• Agree who deals with the investigation at an operational level (and keep them updated with personnel and premises changes). Where internal, such personnel need to understand, for example:
  • The company policy in dealing with different kinds of investigations
  • What officials can and cannot do
  • Which areas of business premises can be examined under statutory powers?
  • What kind of documentation is subject to legal privilege and, if so, has it been protected?
  • Identification of all documents (electronic and hard-copy) inspected and/or removed

Finally, Resolution:

• To ensure that a business can properly and effectively defend any allegations arising from an investigation, senior management needs to know:
  • Likelihood of arrests (if not already effected)
  • How much is involved? What might be the penalties?
  • Is there a requirement for notification of auditors?
  • Extent of adverse market reaction and PR fallout if publicised?

• More detailed issues will arise, such as:
  • Preparing a timeline of events during the investigation – investigations often take a very long time to resolve
  • he identity of all employees involved in the investigation, and agreeing how they should be treated – if the problems have arisen through gross misconduct by individuals, should they be dismissed immediately? If so, the correct employment procedures must be carried out

It’s not just raids

There are far more investigations into taxpayers’ affairs that start with a seemingly routine request for information about particular areas of the taxpayer’s affairs. One recent example concerned a business which received requests from the Revenue for substantial amounts of information in respect of what the director thought were routine contracts, the reason for which was never explained by the officials. When a demand for £500,000 was made, the director realised that perhaps the clue was in the Revenue’s letterhead: “Special Investigations Office”.

Summary

The above is only a broad outline of the issues arising from raids by the Revenue. Any business needs to consider what is right for them, from the multinational to the small business. Whatever the size, forewarned is forearmed.