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Commercial landlords may have to police illicit tobacco sales under HMRC proposals

Commercial property landlords could be forced to actively inspect their properties and police tenants suspected of tobacco and other excise duty evasion under plans proposed by HM Revenue and Customs (HMRC), an expert has warned.

The proposal, which is included among potential new sanctions to tackle tobacco duty evasion and other excise duty evasion, is "another example of HMRC pushing the burden of policing tax compliance onto businesses themselves", according to tax disputes expert Stuart Walsh of Pinsent Masons, the law firm behind Out-Law.com.

"Tobacco duty evasion is a criminal offence and, as such, it is a matter for HMRC and the police to deal with, not businesses," he said.

"Landlords will be concerned that these proposals will be overly burdensome. To regularly check in on their tenants to see what is actually being sold and even request to see their finances could be logistically difficult and time-consuming to enforce, particularly for institutional investors who may have large portfolios of commercial properties. Even more questions are raised about subletting and whether a landlord would be expected to police both the tenant and the subtenant," he said.

The government announced its intention to consult on detailed proposals on sanctions to tackle illicit tobacco sales at the 2016 Budget, following an informal targeted consultation in August 2015. The new consultation, which closes on 10 May 2017, is seeking views on a number of potential sanctions targeted at repeat offenders in particular, including increased financial penalties and publishing the details of more individuals and companies that deliberately evade duty.

The government is also proposing to take action against landlords and landowners, to address concerns that they have been "turning a blind eye" to duty fraud committed on their premises. Landlords may be driven by a desire to "ensure rental income is maintained", and may even be complicit in the fraud in some cases, according to the consultation.

Two different potential approaches are set out in the consultation: a voluntary approach, under which landlords would be encouraged to include a clause in their standard lease agreements expressly prohibiting illicit tobacco or other excise trading; or the introduction of a new statutory duty of care. The new duty would be backed by a civil penalty for landlords that fail to take reasonable steps to ensure that their property is not used to evade duty.

It would be a defence to the new civil offence if a landlord or landowner could show that it had taken reasonable steps to prevent wrongdoing in or on its property. This could include explicit provisions in new leases making it clear that illicit tobacco trading or other excise activity would terminate an existing lease; undertaking "periodic checks" on the premises and requesting information relating to the tenant's business; immediate evictions for violations; and providing HMRC with copies of relevant leases, according to the consultation.

Walsh said that the proposal of adding a voluntary clause to future agreements to help discourage illicit tobacco trading would be "easier for landlords" than the statutory duty also proposed in the paper. However, it was "difficult to see what it would add in practice, as leases will usually already include an obligation not to use a property for any illegal activity", he said.

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