Due diligence requirements for alcohol traders

Out-Law Guide | 20 Jun 2019 | 12:48 pm | 3 min. read

Wholesalers of alcohol and others excise registered businesses must have due diligence procedures in places to identify, manage and document decisions in respect of the risk of tax fraud within their supply chains. Getting it wrong can have serious business implications. HM Revenue & Customs (HMRC) takes a tough approach to compliance and can issue taxpayers with penalties, place conditions on new or existing authorisations, insist upon new or improved due diligence processes or even revoke traders' excise approvals.

The due diligence condition

The due diligence condition applies to all excise registered businesses operating in the alcohol sector, including traders authorised under Warehousekeepers and Owners of Warehoused Goods Regulations (WOWGR), registered as owners of duty suspended goods and/or approved under Alcohol Wholesaler Registration Scheme (AWRS). They are obliged to:

  • ·objectively assess the risk of alcohol fraud in their supply chains;
  • put in place reasonable and proportionate checks to identify fraud;
  • have procedures to ensure timely and effective mitigation where risks are identified; and
  • document checks and have appropriate management governance in place.

The steps to be implemented to meet this due diligence condition place a considerable burden on excise businesses. They require clear policies and processes to be put in place, regular training and guidance to be provided to staff and robust reporting lines and record keeping obligations. This is to ensure that you not only have sufficient processes in place to meet the condition, but you are also to be able to demonstrate compliance to HMRC.

One of the key areas where traders fall down in meeting the due diligence condition is in respect of the requirement to have 'reasonable and proportionate checks'. It is critical that the processes put in place do not adopt a 'one size fits all' approach – HMRC is insistent that the checks carried out by businesses need to be aligned with the level of risk posed, which could be by reference to a single customer, for example, a customer ordering very large quantities, or a category of customers, such as those operating duty suspense and duty drawback.

Duty suspense

Alcohol can move between the UK and the rest of the EU with excise duty suspended provided it is moved between approved warehouses or to certain consignees.

Alcohol sold on a duty suspense basis presents a higher risk of fraud. This is especially the case where it is sold to near-continental markets, as there is an inherent risk of it being diverted back into the UK without payment of duty.

For this reason, HMRC consider that traders supplying alcohol to these markets, especially in large quantities, are required to carry out greater checks and controls than for goods sold on a duty paid basis.

For sales on a duty suspended basis, the purported market for the products will be a crucial factor in evaluating risk and for this reason, HMRC requires traders selling to customers on a duty suspended basis to adequately test the existence and size of the market where the goods are destined.

Duty drawback

Duty suspense customers will generally present a greater risk of excise fraud than duty paid customers. However, in instances where duty paid customers operate duty drawback, HMRC will expect similar levels of due diligence checks to be applied. 

Excise duty drawback is a refund of UK excise duty made when excise goods have not been and will not be consumed in the UK.

HMRC have had a particular focus over the last year or so on tackling fraud committed under the duty drawback regime. As HMRC deals with claims for duty drawback on a purely transactional basis, paying out all claims where the trader can provide a valid duty paid status letter, HMRC consider that the obligation is placed on traders to mitigate drawback being claimed fraudulently within their supply chains.

HMRC have become aware of instances of duty drawback being claimed fraudulently using duty paid status letters relating to different consignments, customers or that are years out-of-date. HMRC attributes this to the letters being provided by suppliers for the claim being vague and/or insufficient. Therefore, HMRC is urging suppliers to draft the letters they issue to their customers evidencing duty payment as tightly as possible.

Action points

In light of HMRC's tough stance on due diligence, it is now more crucial than ever that traders have procedures in place to identify, manage and document decisions in respect of the risk of tax fraud within their supply chains.

It is impossible to completely eliminate the possibility of customers that you trade with or goods you supply getting caught up in illicit supply chains, but provided that you carry out reasonable and proportionate due diligence checks and can document that risks are identified, mitigated and managed as part of their processes, you should be in a strong position to show you have met your own due diligence obligations required for your excise approvals.

In the spirit of openness and transparency with HMRC, it may be sensible to seek guidance from HMRC as to whether the processes you have in place meet the due diligence condition or whether there are any improvements that could be put in place to ensure compliance. Although bear in mind that it is unlikely HMRC will provide you with complete assurance by 'signing off' your due diligence processes.