Court of Appeal dismisses challenges to UK excise warehouse regime

Out-Law News | 05 Aug 2019 | 12:56 pm | 4 min. read

Important aspects of the UK's regime for holding excise goods in suspension in an excise warehouse do not contravene EU law, the Court of Appeal in England has decided.

Excise warehouse operator Seabrook Warehousing Limited challenged the lawfulness of certain aspects of the regime after HM Revenue & Customs (HMRC) revoked its approval to act as a 'duty representative' of non-UK based owners of excise goods on the basis that it was not a 'fit and proper person' because it had not carried out sufficient due diligence on its customers.

"Although the Court of Appeal dismissed arguments that aspects of the regime were contrary to EU law, it made some interesting observations in relation to the way the due diligence condition operates in practice," said Jake Landman, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.

Excise duty is an EU tax which is paid on goods including oil, alcohol and tobacco products. It is paid when a 'duty point' has arisen, such as when goods are released for consumption. Goods subject to excise duty can move between the UK and the rest of the EU with excise duty suspended provided they are moved between approved excise warehouses or to certain consignees. Goods sold on a duty suspense basis present a high risk of fraud as there is an inherent risk of them being diverted back into the UK without payment of duty.

In order to operate an excise warehouse, a business must be approved by HMRC. It will only approve persons who can demonstrate that they are fit and proper to carry out an excise business. Registered excise businesses must make sure that they are carrying out appropriate due diligence checks on their suppliers, customers and supply chains. The due diligence requirements are set out in Excise Notice 196 issued by HMRC.

Owners of excise goods in an excise warehouse must also be approved by HMRC as fit and proper persons. Non-UK based owners cannot be approved and must appoint a 'duty representative' established in the UK, who must be approved by HMRC.

Before acting for an owner, a duty representative must carry out certain checks on the owner and retain evidence that they have carried out the required checks. Failure to complete these checks and hold the required evidence can result in the duty representative’s registration being revoked and may also affect any other excise registrations or approvals they hold.

"The steps required to meet the due diligence condition can place a considerable burden on excise businesses. Clear policies and processes must be put in place, regular training and guidance provided to staff and there must be robust reporting lines and record keeping obligations," Landman said.

"Failing to comply with the due diligence condition can have very serious consequences for a business, which could find itself suddenly unable to trade. Getting it right is therefore crucial," he said.

Seabrook was approved as both a warehouse operator and a duty representative. HMRC revoked its approval as a duty representative, claiming that it had not obtained the evidence required about its customers under the due diligence requirements.

HMRC subsequently indicated that it was minded to revoke Seabrook's warehouse operator approval. Seabrook appealed to the First-tier Tribunal (FTT) against the withdrawal of the approvals and, in parallel, challenged the legality of the regime by way of judicial review. It has managed to agree with HMRC that it can continue operating its business, pending the outcome of the various applications. The hearing of the FTT appeals has been expedited and is due to take place in late September.

Although a UK established business itself, Seabrook claimed that the requirement for non-UK owners to appoint a duty representative was contrary to EU law and to the EU law prohibition on discrimination and the principle of freedom of establishment.

The Court of Appeal accepted that the UK’s duty representative regime was potentially discriminatory, but it said this could be justified and was proportional. The Court considered there was no other less restrictive alternative to the duty representative regime which could be plausibly found on the evidence.

However, the court dismissed as "fanciful" an argument from HMRC that the ability to trade in excise goods under duty suspension is a 'privilege' rather than a right, and as such engages no protection under EU law.

The Court considered whether foreign owners should have been allowed to register with HMRC in their own right instead of having to appoint a duty representative. It concluded that HMRC should not have to be required to satisfy themselves of the suitability of traders resident outside the jurisdiction.

The Court of Appeal also dismissed Seabrook's argument that the due diligence requirements in Notice 196 contravene EU law because they effectively transfer HMRC’s monitoring duties to traders.

“One of the difficulties with the practical application of the due diligence condition … is that it applies to businesses of widely differing size and type, and does not normally differentiate between (for example) the requirements which apply to a warehousekeeper and those which apply to a duty representative,” Lord Henderson said in his judgment.

“The guidance also uses imprecise phrases like 'the supply chains in which you operate', without explaining in what sense (if any) a warehousekeeper is considered to form part of, or operate within, the supply chains of its customers,” he said.

The Court also rejected the idea that the due diligence requirements were discriminatory. It said that any element of discrimination on the basis of the place of establishment of an owner of excise goods is justified because it forms an integral part of a reasonable and proportionate legislative scheme adopted by the UK to combat excise duty evasion.

“Seabrook’s main complaints in relation to this part of the case seem to me to relate to the way in which the due diligence requirements are in practice applied and interpreted by HMRC, and the alleged failure of HMRC to make sufficient allowance for the nature of the businesses carried on by warehousekeepers and duty representatives, who are essentially supplying ancillary services and operating on relatively low margins, when compared with the owners of excise goods, who are the primary participants in the relevant supply chains, and whose profit margins are correspondingly greater. There may, or may not, be force in at least some of these complaints, but in my opinion the appropriate forum for their resolution is the FTT,” Lord Henderson said.