Tougher excise penalties target diversion fraud

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John Stokdyk
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Excise duties are easily overlooked by accountants, but the increasing prevalence of diversion fraud is rife is pushing it up HMRC’s agenda, writes Phil Rimmer.

Goods such as alcoholic products are subject to the payment of excise duty in the EU member state in which they are released onto the home market. They can, nonetheless, be stored “duty suspended” in bonded warehouses approved by and registered with HMRC. There is a common system of such authorised tax warehouses across Europe, allowing excise goods to be moved between warehouses and international borders under duty suspension.

However, since the introduction of the single market in 1993, organised criminal gangs have exploited the system introduced to facilitate the free movement of goods between EU Member States. They are doing so on a commercial quantities in frauds costing an estimated £1bn a year in lost duty.

In one version of diversion fraud, consignments of excise goods (such as alcohol) intended for despatch from the UK to other EU member states never reach their intended destination and are instead illegally diverted for sale in the home market, duty free, with the excise duty due to HMRC being defrauded.

The fraud may also operate in reverse, in relation to excise goods despatched from another member state to the UK but which apparently go missing after arrival in the UK.

For many years, HMRC has turned a critical eye to the duty suspended excise regime. A series of arrangements, penalties and assessment powers have been introduced allowing HMRC to recover lost excise duty by specifying who is liable to pay it, and penalising those trading in illicit alcohol within fraudulent supply chains.

One such measure involves the introduction from 1 April 2010 of new VAT and excise wrongdoing penalties under Schedule 41 of the Finance Act 2008.

Phil Rimmer is a director of
M&R Tax Advisers and can be contacted on either 07590 047545 or phil[at]

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