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Draconian Customs powers put businesses at risk, warn warehousemen

[ July 10, 2013   //   ]

The UK Warehousing Association (UKWA) is warning that HM Revenue & Customs (HMRC) could drive long established and honest logistics services firms out of business with its “draconian” sanctions on companies in the excise goods supply chain.

Echoing comments by TT Club legal consultant, Ian Hyslop in FBJ 4 2013, the Association says that logistics service businesses – including forwarders, third party warehouse keepers and hauliers – risk “crippling” duty assessments and fines if they make any procedural error relating to any duty-suspended excise goods that they may store or distribute on behalf of their clients.

Alan Powell, UKWA’s adviser on excise matters, explains: “Any breach of duty suspension arrangements creates a ‘duty point’ and means that the company which created that ’duty point’ has liability for all the duty owed. In addition, the company would also face a ‘wrong doing’ penalty of up to 100% of the duty owed for handling the goods if the duty isn’t paid at the ‘duty point.’

Powell told FBJ that the problems stemmed from HMRC’s implementation of EU law, together with a new penalty regime for excise goods. While the UK’s penalties, he said, may be proportionate against companies that were trying to gain unfair advantages or even cheat the Revenue, they are wholly disproportionate when used against compliant companies who make an honest mistake. HMRC had not enacted the EU legislation properly, Powell argued, “because the de facto penalty imposed for an assessment to duty for an accidental triggering of a duty point and the actual wrong-doing penalty associated with it are not proportionate to the irregularity giving rise to the sanctions.”

Laws passed in 2010 require duty to be paid at the earliest of stipulated duty points, including any breach of duty suspension arrangements. At the same time, HMRC was given powers to raise wrong-doing penalties, which are linked to 100% of the duty ‘potentially at risk’.

He continued: “Any company that accidentally ‘ticks the wrong box’ while goods are under duty suspense – whether in production, holding or movement –will create a ‘duty point’. And if the company doesn’t pay the duty at that time, a liability of up to 100% of the duty will be incurred for ‘holding’

duty-unpaid goods.

“Furthermore, everyone in the supply chain that handles the goods on which the duty hasn’t been paid is similarly liable to the penalty,” Powell added.

For example, documentation accompanying excise goods might stipulate that the goods should travel on a direct shipping service from the UK to, say, Russia. But if a freight forwarder decided, for operational reasons, to use a transhipment service via Antwerp – perhaps because it had missed the direct service – that would trigger an assessment to the full excise duty and a wrong-doing penalty, payable by the forwarder. The wrong-doing penalty could be as much as 100% of the duty payable, and although that can be mitigated by HMRC, Powell said it was unlikely that it would be less than 10% – still a very substantial amount of money where large amounts of excise duty are involved. This contrasts with the £250 per error penalties that HMRC may still impose under an existing and parallel regime – which are, in any case, discretionary.

Powell said that at a Joint Alcohol and Tobacco Consultative Group (JATCG) in the summer of 2009, where the possibility of bringing in the proposed wrong-doing penalties was discussed, he had also specifically asked HMRC for evidence that the ‘fixed penalty’ regime had failed to prevent non-compliance, before bringing in a much more severe system. The senior HMRC representative had agreed to have the matter investigated but no information has since been received, he said.

Already, some businesses are facing penalties amounting to millions of pounds, including spirits producers and associated traders, and whisky producers in Scotland – often cited as one of the UK’s success stories by a Government allegedly keen to encourage firms to export. Already, Powell said he was advising alcohol, tobacco and oils producers and warehousing and freight companies to be aware of the problem as their utmost priority and for logistics companies to consider whether they should trade in excise goods until the law is clarified and applied proportionately.

There was also a danger, he said, that if legitimate firms were frightened off handling excise goods, it would leave the trade open to less scrupulous operators who would deal with the problem of potential fines by disappearing or evading the authorities. The existing regime also greatly discouraged honest firms from notifying the authorities should they themselves discover an error in paperwork that could lead to a mandatory huge penalty, even if voluntarily notified.

“Everyone accepts that HMRC needs strong powers to deter non-compliance, especially in the light of excise frauds, but such powers must be proportionate and should not jeopardise honest businesses that simply make a genuine error,” says Alan Powell. “However, we are seeing a growing number of cases where long-established and legitimate businesses have fallen foul of the new penalty regime.”

It is almost certain that companies hit by penalties will mount legal challenges, to Europe if necessary, on the grounds that the sanctions are disproportionate and breach fundamental rights and freedoms, but this avenue will probably only be open to large companies with the financial and legal clout to take on HMRC.

He adds: “HMRC says that the regime is meant to deter businesses from gaining an unfair advantage and to ‘change the behaviour’ of the non-compliant. But compliant businesses are being punished disproportionately for occasional human or system errors. HMRC contends that it is constrained to enforce the law as it stands but has undertaken to review the proportionality of the penalty regime.

However, HMRC has given no indication of the timetable for the review and at the time of writing had not published its terms of reference, which have been awaited since mid-April, said Powell.

Following recent discussions with industry, HMRC confirmed that it “is keen on having a system that hits fraudsters but does not unduly impact on legitimate trade. Nevertheless, this balance is not easy and no assumptions should be made that any changes will result from the review.”

UKWA believes that the random creation of ‘duty points’ as a result of genuine error and the resultant huge assessments and penalties incurred, render the law totally unfit for purpose.

Alan Powell adds: “We have taken initial legal advice from senior counsel about this problem and feel that, as it stands, UK law is inconsistent with the purpose of overarching EU law and clearly lacking proportionality.”

Roger Williams, UKWA’s chief executive officer, comments: “The current rules evidently do not deter fraudsters but put legitimate business at great risk.

We will fight this all the way for our members.”

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