Memorandum from HM Customs and Excise
HOLDING AND MOVING ALCOHOL AND TOBACCO IN
THE SINGLE MARKET
BACKGROUND
1. Alcohol and tobacco have been subject
to excise duty for a very long time in the UK and in most member
states of the EU. The risks involved in holding and moving these
high-value goods has always rendered them subject to special customs
procedures and controls.
PRE-SINGLE
MARKET
The Bonded Warehouse System
2. Because of the relatively high proportion
of the final value of alcohol and tobacco which is represented
by duty, the UK always offered some facility to domestic manufacturers
and importers to store alcohol (particularly spirits) and tobacco
in duty-suspended storage before it was released for consumption.
3. A system of bonded warehouses developed
in the UK over 200 years ago in which many products including
imported tobacco and alcohol could be held with any customs duty
and excise duty suspended (the warehouse keeper having provided
financial security for the duty due in the form of a bond). Domestic
spirits, which required a long time to mature before they could
be sold, were also routinely held in bonded warehouses.
4. Two main kinds of warehouse developed:
those owned and run by the "proprietor" (ie owner) of
the goods; and "general" or "third-party"
warehouses which were run by a professional warehouse-management
company, usually on behalf of a large number of smaller proprietors.
The latter particularly helped smaller importers who could not
bear the administrative costs and other requirements of running
a warehouse. There are currently around 1,100 registered warehouses
in the UK.
5. Until relatively recently, each warehouse
had a resident officer who worked largely on site in accommodation
provided by the warehouse. In the late 1970s and early 1980s methods
of control began to change. Excise officers were more likely to
be based in a local excise office from where they controlled a
number of warehouses.
6. The main feature of the controls exercised
by excise officers was to ensure that everything brought into
the UK, or manufactured in the UK, for warehousing was properly
entered into the warehouse stock records. Control then focused
on ensuring good stock control and security and ensuring that
removals were properly accounted for. In the case of goods removed
for domestic consumption, duty would be charged; in the case of
exports and other kinds of duty-free removal, proper evidence
of export or end-use would be needed.
Importing into the UK
7. In the case of imported tobacco and alcohol
(mainly wines and spirits), the importer had a choice when his
goods arrived at the port. He could pay duty at the port and then
immediately put the goods into the supply chain; or he could request
that his goods be moved to a bonded warehouse under duty suspense
(in which case they remained under Customs control). The goods
routinely went under seal to the warehouse; the officer for the
warehouse was notified separately by the port officer that goods
had been dispatched to his warehouse. The officer was therefore
able to reconcile the warehousekeeper's record of receipts with
the ports' records of goods sent inland for warehousing.
Domestic Manufacture
8. Distillers each had their own bonded
warehouses into which immature spirits were warehoused on production.
Brewers, UK wind and cider makers, and tobacco manufacturers had
similar arrangements for storing their product in duty suspense.
PROCEDURES IN
THE SINGLE
MARKET
9. With the advent of the Single Market
a new system of holding and moving excise goods in the EU was
devised. This is described in Directive 92/12/EEC (the "Holding
and Movement Directive"). To a large extent this built on
the UK's system of warehousing. Any regular trader in excise goods
was required to become a "tax warehouse" and the transfer
of alcohol and tobacco products in duty suspense within the EU
was only allowed between tax warehouses. For businesses that found
the costs of running a warehouse too great or which did not trade
in excise goods regularly, other arrangements were put in place.
In the UK these alternative arrangements—which make no provision
for holding goods in duty suspension—are known as the Registered
Excise Dealers and Shippers Scheme (REDS); and the Occasional
Importers scheme.
10. Imported alcohol and tobacco from third
(non-EU) countries continued to be handled as it was pre-Single
Market.
Duty Suspension
11. Duty suspension is the suspending of
excise duty while goods are being produced, processed, stored
and moved between excise warehouses (the main form of tax warehouse
in the UK) and between excise warehouses and approved persons.
The duty suspension system is applied while goods liable to excise
duty are being:
— produced or processed (including
refinement of the product, maturing and distilling; packaging,
casking, bottling, labelling etc);
— stored in an excise warehouse;
— moved from an excise warehouse to
another excise warehouse or to an approved person; and
— moved from an excise warehouse for
export to a third country;
— moved on import from a third country
to an excise warehouse.
12. Premises used for holding duty-suspended
goods must be approved. Warehousekeepers also need to be authorised
and, since April 1999, owners of goods in warehouse have to be
registered by Customs and Excise.
13. To obtain authorisation from Customs
and Excise, traders must satisfy the Department that they will
provide sufficient physical and financial security (if required)
and adequate management and supervisory controls to safeguard
the storage of duty-unpaid goods.
Excise Warehouses
14. Every Member State now has a system
of warehouses in which excise goods can be held and from which
movements in duty suspense to other warehouses can be initiated.
15. Movements between warehouses are accompanied
by an Accompanying Administrative Document (AAD) which is the
main document used in the control and audit of such duty-suspended
movements. Directive 92/12 provides that AADs can be printed by
tax administrations (often necessary for smaller businesses) and
allows equivalents to be produced by traders' own smaller businesses)
and allows equivalents to be produced by traders' own computer
systems. An AAD comes in quadruplicate:
— copy 1 is retained by the consigning
warehouse;
— copy 2 travels with the goods to
the consignee warehouse;
— copy 3 also travels with the goods
to the consignee warehouse. On receipt of the goods, the consignee
warehouse, REDS or occasional importer is required to certify
copy 3 to say whether all the goods have been properly received
and send it back to the consignor warehouse;
— copy 4 (which is optional) is for
the tax authority of the Member State of destination (ie the officer
responsible for the consignee warehouse). The UK does not currently
require its warehouses to forward copy 4 to local offices because
of the administrative burden this entails for warehouse and Customs
staff. Instead these documents can be retained by the warehousekeeper
and examined as part of audit visits.
Control of Warehouses
16. Generally speaking, port officers are
no longer involved in the movement of excise goods through the
ports and so, unlike the pre-Single Market scenario, the warehouse
officer no longer receives warning of arrival of excise goods
from port officers. This can make fraud easier to perpetrate and
has led the Member States to agree to introduce an Early Warning
System through which they can warn each other of the arrival of
excise goods, particularly where there is any suspicion that fraud
might be perpetrated.
17. A fundamental principle of the Single
Market is that movement of goods from one Member State to another
may not give rise to checks that may impede free movement of those
goods. As a consequence, Customs have no routine involvement in
the movement of goods, but ensure that a complete and accurate
account is maintained of all movements as part of a risk-based
audit programme. At that audit, a series of verification checks
are undertaken on receipted copy 3s of AADs.
18. However, in exceptional circumstances
where it is established that a removal of goods would create a
significant revenue risk, restrictions may be placed upon the
removal of those goods by invocation of a Commissioners' Direction
under the Excise Warehousing (Etc) Regulations 1988. These restrictions
could include an additional requirement for financial security
or a temporary embargo on the removal, until such time as Customs
is satisfied as to the legitimacy of the movement.
19. In addition to the routine audit checks
of local Excise staff, 1997 saw the creation of special teams
of staff who focused on import/export fraud—the so-called
IMPEX teams. They liaised closely with warehouses to identify
suspect movements and had a significant impact in tackling various
kinds of fraud. They would also undertake promiscuous visits to
warehouses outside the normal audit programme, thus bringing greater
overall assurance of the integrity of the holding and movement
system.
Role of the Warehousekeeper
20. The warehousekeeper must keep a stock
account in which he enters details of all the goods in his warehouse.
He must make regular and detailed stock checks. Movements of goods
to other warehouses in the UK and the EU may take place in duty
suspension, and must be recorded in detail. The control system
relies on the warehousekeeper being made responsible for checking
that the movement is "legitimate". It is his responsibility
not to release goods in duty suspension unless he is satisfied
that the receiving person is appropriately authorised to receive
them. Before consigning goods to another warehouse, the dispatching
warehousekeeper must satisfy himself that he is dispatching goods
to an authorised warehouse. An EU-wide register of warehouses
is maintained to facilitate such checks; this is called SEED (System
for Exchange of Excise Data). If copy 3 of the AAD is not returned
to the dispatching warehouse, or if it is returned with a loss
reported, Customs can call for the duty, usually from the warehousekeeper.
21. In addition to checking that the receiving
warehouse is authorised, the warehousekeeper is expected to supervise
the dispatch and take all reasonable steps to safeguard the completion
of the movement, such as preventing goods leaving in suspicious
or irregular circumstances (for example, unusual or unsuitable
vehicles being used; large cash payments being made; the same
vehicle being used on consecutive days). He must ensure that all
goods held in warehouse are the property of a registered owner.
22. Other suggested (but not mandatory)
checks include confirming that the owners of the goods are bona
fide traders; that the receiving warehouse is expecting delivery
of the goods (and confirming that by requesting a fax); and that
the haulier is not a "man of straw".
23. At present the warehousekeeper is required
to ensure that any financial security required in respect of movements
is in place.
24. After dispatch of duty-suspended goods
to another authorised warehouse, or for export to a third country,
warehousekeepers must:
— ensure that certificates of shipment
or receipt are obtained promptly, checking, especially for inter-warehouse
movements within the EU that copy 3 of the AAD is correctly stamped
and returned by the authorised consignee;
— send notification on a monthly basis
to a Customs and Excise Advice Centre if satisfactory evidence
of receipt is not received within two months of the start of an
EU movement or within 15 days of despatch for a movement to another
UK warehouse; and
— account for the duty at UK rates
if satisfactory evidence of receipt is not obtained within six
months;
— when problems arise on intra-EU movements,
make initial enquiries in an effort to resolve them, and immediately
inform the local advice centre of all shortages which involve
a potential duty liability (at UK rates) of £2,000 or more;
— discharge liability to duty due in
another member state because of shortages.
Warehouses—Movement Guarantees
25. Directive 92/12/EEC requires any duty-suspended
movement of excise goods to be underwritten by a guarantee. This
requirement is usually met by the registered warehousekeeper providing
financial security for movements between the UK warehouse and
registered premises in another Member State. In place of the guarantee
provided by the warehousekeeper, guarantees may be given by the
owner of the goods or the transporter. Goods imported into the
UK from another Member State will travel under a guarantee provided
under the financial-security arrangements of that Member State.
26. In the event that goods go missing in
the UK, Customs would call for relevant UK duty. If the goods
go missing, or the loss is discovered, in another Member State,
that State has the right to call for its duty for the UK guarantor.
If it cannot be ascertained in which state goods went missing,
duty is due in the member state of dispatch.
27. In the UK, the guarantee is currently
calculated as the largest amount of duty likely to be suspended
in a single consignment. The guarantee is generally meant to cater
for minor pilfering and unaccounted losses rather than major fraud.
It does not, and in practice cannot, cover all of the duty that
might be at risk from shipments from any one warehouse.
Warehouses—Holding (or Premises) Guarantees
28. Directive 92/12/EEC allows Member States
to set their own financial security requirements for the production,
processing and holding of excise goods. At present the UK does
not routinely impose an obligation for a financial security because
the level of loss actually occurring in warehouse is relatively
small. However, this requirement is being reconsidered.
Registered Excise Dealers and Shippers (REDS)
29. Directive 92/12 makes it possible for
businesses in one Member State to buy goods from another state
in duty suspense but account for duty as soon as they are received.
This obviates the expense of establishing a tax warehouse or incurring
the costs of renting space in a third-party warehouse and, for
example, facilitates just-in-time deliveries from the Continent.
Those who wish to be relieved of the requirement to notify Customs
in advance of each importation can apply to be registered with
Customs. These registered traders are known as REDS. Importers
can be REDS in their own right, or use an agent who is a REDS.
REDS need to be approved by Customs and lodge a guarantee for
any duty likely to become due. REDS are required to submit monthly
returns of their activities to Customs.
Occasional importers
30. Those who do not wish to register with
Customs must give advance notification on each occasion that they
wish to import goods. They are known as occasional importers.
Effectively, the importer pre-pays the duty on a future shipment
and is provided with the necessary documentation to admit the
goods into the UK.
TYPES OF
FRAUD
Outward Diversion Fraud
31. Following the introduction of the Single
Market, the excise holding and movements system soon became the
focus of fraudsters. The initial manifestation of their activities
was targeting of a number of UK warehouses by criminals who, through
the exploitation of the weaknesses in the control system, were
able to acquire large quantities of duty-suspended goods, ostensibly
for removal to other EU warehouses. In reality, the goods were
diverted direct to the UK market.
32. Once control of the warehouses had passed
from regular excise visits and was instead underpinned by the
(essentially) trader-controlled AAD system, the scope for fraud
increased dramatically. The receipting stamps on these copy 3
documents were forged in the majority of the frauds and were therefore
not detected by the warehousekeepers concerned. As even legitimate
documents can take some considerable time to be returned (there
is a six month time limit in UK law for the discharge of an AAD),
and Departmental assurance audits may not take place for some
time, any possible diversion can take a long time to be recognised.
33. This type of fraud reduced as a result
of a number of departmental initiatives including, for example,
the introduction of IMPEX teams.
Inward diversion and freight smuggling
34. Customs and Excise's current view is
that the bulk of the present alcohol problem is centred on imports.
Spirits fraud is perpetrated chiefly through inward diversion
and freight smuggling.
35. Inward diversion fraud is perpetrated
when alcohol products moving from the EU to the UK under the AAD
system in duty suspension are diverted to home use without payment
of duty. Typically the consignment will move accompanied by a
genuine AAD that will be proffered if the consignment is challenged
en route. If challenged, the driver may thereafter go to the stated
warehouse or simply divert the goods within the UK. If diverted,
a fraudulent copy 3 may be sent back to the dispatching warehouse
in the member state of departure. The fraudster can of course
play safe by instructing drivers, if challenged, to go to the
stated warehouse where the movement would be legitimately discharged.
Thereafter the same goods could move within the UK, ostensibly
to another warehouse, where they have another chance of diversion
to their originally intended (illegal) destination.
36. With freight smuggling, large quantities
of alcohol or tobacco are misdescribed to avoid payment of UK
duty. There is no attempt to legitimise the importation, and the
goods simply travel without any back-up documentation, with the
fraudster relying on the low rate of interception. There is rarely
any serious attempt to conceal the goods.
November 2000
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