Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Tougher excise penalties target diversion fraud

by
15th Apr 2011
Save content
Have you found this content useful? Use the button above to save it to your profile.

Excise duties are easily overlooked by accountants, but the increasing prevalence of diversion fraud 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.

HMRC will impose excise wrongdoing penalties where a person:
•    handles goods on which excise duty has not been paid or deferred;
•    uses a product in a way that means more excise duty should have been paid; or
•    supplies a product at a lower rate of excise duty knowing that it will be used in a way that means a higher rate of excise duty should be paid.

A wrongdoing penalty will not be charged by HMRC where a reasonable excuse – being “an unforeseeable and exceptional event beyond your control” – for the relevant activity can be demonstrated. However, HMRC will not consider deliberate action to amount to a reasonable excuse.

The wrongdoing penalty will be calculated as a percentage of the lost revenue, ranging from a minimum (0%) through to a maximum (100%) depending on whether there is a reasonable excuse or the wrongdoing was non-deliberate, deliberate but not concealed or deliberate and concealed; and the extent to which the wrongdoing has been disclosed to HMRC.

It should be noted that where HMRC can identify that a company officer (a director or company secretary) caused a deliberate wrongdoing, this person will be personally liable for the payment of the penalty if there is evidence that they gained personally. This liability will also occur if the company is insolvent or there are grounds to suspect that the company will become insolvent.

In simple terms, these new provisions allow HMRC to recover duty from anyone found holding excise goods which have not had duty paid on them previously, even where the goods have now been released onto the UK market for wholesale or retail. HMRC can also issue a penalty where there is evidence of wrongdoing; and seize the goods. This is a severe penalty system with a stringent strict liability element.

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

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.