Physical possession starting point for excise duty charge rules UK tribunal

Out-Law Legal Update | 17 Oct 2019 | 1:43 pm | 5 min. read

UK tax authority HMRC is entitled to assess the physical holder of goods for unpaid excise duty where there is no evidence that previous suppliers physically possessed the goods, the Upper Tribunal has confirmed.

The Tribunal said that it is possible for a person with control over goods, rather than physical possession, to be treated as 'holding' them. But it said that it was up to the person assessed to establish that a person earlier in the supply chain had been 'holding' the goods and should be assessed instead. The ruling emphasises the importance of effective due diligence procedures in supply chains for excise goods.

  • Person in physical possession of goods liable for unpaid excise duty as 'holder' if no evidence of earlier duty point
  • HMRC entitled to assess person in physical possession of goods, to displace assessment the person assessed must establish earlier supplier was 'holder'
  • Effective due diligence crucial in alcohol supply chains

Dawson's Wales Limited (DWL) was a wholesaler of alcoholic drinks. HMRC assessed that it owed around £3.7m of excise duty on the basis that there was insufficient evidence that excise duty had been paid on certain supplies of goods made to DWL and physically held by DWL. HMRC traced the supply chain back from DWL’s suppliers to missing, deregistered or hi-jacked companies.

Excise duty is charged when goods subject to excise duty, such as alcoholic drinks, are produced or imported into the EU, unless duty suspension arrangements apply to them. Excise goods subject to duty suspension arrangements must generally be held in a 'tax warehouse' operated by an authorised warehousekeeper. If duty suspense arrangements do apply then chargeability to excise duty is deferred until the goods depart from a duty suspension arrangement.

The identity of the person liable to pay the duty depends on the circumstances in which chargeability has arisen. If chargeability arises because the goods are held outside a duty suspension arrangement and excise duty has not been paid the person liable to pay the duty is the person 'holding' the excise goods at that time.

HMRC says that there is a considerable amount of excise duty fraud.

DWL was assessed because HMRC had no evidence that excise duty was paid on the goods and could not establish that any of the companies appearing further back in the supply chain took physical possession of the goods prior to DWL. The First-tier Tax Tribunal considered the case as a preliminary issue and the parties agreed that the goods were not physically received and held by DWL’s suppliers.

HMRC said that the notion of physical possession is at the heart of the concept of 'holding'. It argued that determining who is in physical possession of the goods is the appropriate starting point for determining who holds the goods, although it accepted that in certain circumstances the owner of the goods, through the principles of agency, could also be considered to be the holder of the goods.

DWL argued that the 'holder' of goods includes people exercising control over the goods. It said that HMRC was obliged to assess DWL’s suppliers and not DWL because the identities of all those suppliers were known to HMRC, and because those suppliers had the power to instruct the physical holder of the goods to deliver them to its chosen customer.

The Upper Tribunal had previously ruled in the case of Davison & Robinson that HMRC has no discretion as to who to assess where there have been multiple holders of goods and excise duty has not been paid. HMRC is required to assess against the first established excise duty point.

In HMRC v Perfect the Court of Appeal approved the observation of  the UT in Davison & Robinson that in the absence of any relevant information relating to any prior release for consumption, HMRC must assess the person they find to be holding the goods in question, if that is the only excise duty point which can be established.

In the DWL case the UT said that the starting point in determining who is 'holding' the goods at the relevant time must be the person who has physical possession of them. Once the physical holder of the goods is identified, it said the correct approach is to then to consider whether the circumstances of that possession are such that it is inappropriate for that person to be considered to be 'holding' the goods.

The UT did not dispute that it is possible for a person with actual or legal control over goods, rather than physical possession, to be treated as 'holding' them. However, it said there needs to be evidence that such control exists. It rejected DWL's argument that HMRC had all the necessary information from the invoices from DWL's suppliers to assess those suppliers for the excise duty.

The UT said that where HMRC assesses the person holding duty unpaid goods, a challenge to the assessment on the basis that there was an earlier excise duty point can only be successful if it can be established:

  • who had physical possession at the time that the alleged earlier excise duty point occurred;
  • who is the person alleged to have de facto or legal control over the goods who it is said should be assessed rather than the subsequent holder and how that person is said to have such control and the basis on which it was being exercised;
  • what time at which the excise duty point arose. Whilst precise temporal exactitude is not essential, the date of an invoice is not sufficient in itself without establishing who was in possession of the goods at some identified point or points in time;
  • where the goods were being held at the relevant time. In the case of goods being transported, that could be by reference to the means of transport or the location of that means of transport at some point in time, possibly immediately prior to the delivery of the goods at a particular location.

The UT said that in the absence of any evidence that establishes an earlier excise duty point, the person holding the goods at the time that it is established that the goods are being held at a specific location but are no longer held pursuant to a duty suspension arrangement is chargeable to the unpaid duty.

As a result of the assumed facts for the preliminary hearing, DWL was not able to show that there was an earlier excise duty point. However, the UT remitted the case back to the FTT for the full hearing of the case and said that in the FTT it will be open to DWL to try to establish that there was an earlier excise duty point prior to the supply to DWL.

The case illustrates the pitfalls for handlers of excise duty goods where there has been fraud in the supply chain. Effective due diligence of the supply chain is crucial to ensure that legitimate businesses do not suffer when others have committed fraud.