Documents considered by the Committee on 27 June 2018 Contents

5Duty on alcohol, tobacco and fuel: EU excise reforms

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; drawn to the attention of Business, Energy & Industrial Strategy Committee and the Treasury Committee

Document details

(a) Proposal for a Council Directive laying down the general arrangements for excise duty (recast); (b) Proposal for a Decision on computerising the movement and surveillance of excise goods (recast); (c) Proposal for a Council Regulation amending Regulation (EU) No 389/2012 on administrative cooperation in the field of excise duties as regards the content of electronic register; (d) Proposal for a Council Directive amending Directive 92/83/EEC on the harmonization of the structures of excise duties on alcohol and alcoholic beverages

Legal base

(a), (c) and (d) Article 113 TFEU; special legislative procedure; unanimity; (b) Article 114 TFEU; ordinary legislative procedure; QMV


Revenue and Customs AND Treasury

Document Numbers

(a) (39854), 9571/18 + ADDs 1–3, COM(18) 346; (b) (39847), 9567/18 + ADD 1, COM(18) 341; (c) (39840), 9568/18, COM(18) 349; (d) (39836), 9570/18 + ADDs 1–2, COM(18) 334

Summary and Committee’s conclusions

5.1Within the EU, there is an extensive legal framework for the application of excise duty to certain goods (alcoholic products, tobacco products and oils), as well as the rules for moving such goods between Member States. These rules are set by EU Directives and implemented by domestic law in each EU country. Excise duty revenues amounted to £48 billion in the UK in 2016–17.13

5.2The EU’s current legal system and electronic infrastructure for excise were created specifically to allow for the complete abolition of border controls on goods moving between EU Member States within the internal market: a core feature is therefore that it allows businesses within the EU to move excise goods between countries using a compulsory tracking mechanism (the Excise Movement & Control System or EMCS), which seeks to ensure that excise duty is paid before the goods are released for consumption. Excise goods that enter the EU from outside the Customs Union must first clear customs controls before they can be entered into the EMCS.

5.3In May 2018, following an evaluation exercise, the European Commission proposed a number of legal changes to the EU’s Excise Directives affecting excise on alcoholic drinks (especially cider). The proposed reforms, which we have described in more detail in “Background” below,14 include:

5.4The Minister’s Explanatory Memoranda broadly welcomed the proposed changes, with some reservations with respect to the interaction between the proposed EU definition of ‘cider’ and the reduced duty rates with current UK practice, as well as the cost-benefit analysis of extending the EMCS to ‘duty paid’ intra-EU movements (which only account for 3 per cent of cross-border excise movements in the EU).

5.5The proposals related to alcohol duty would apply from January 2020, and the general changes to the overall excise system from April 2021. The former would therefore have to be implemented in the UK under the post-Brexit transitional arrangement (due to end on 31 December 2020), while the latter would not. However, the implications of these proposals (and the effect of EU excise law in the UK more generally) after the scheduled end date of the transition are not yet clear, even though the Government’s ambition of continued trade in goods with the EU without customs controls requires an agreement on excise. Despite this, the Minister’s Explanatory Memoranda make no comment on the long-term implications of Brexit for trade with the EU in alcohol, tobacco and fuel.

5.6We note in this respect that the European Commission has, by contrast, issued a detailed notice on the implications of EU exit for indirect taxes, including excise duty. If the UK leaves the common excise area, goods exported from the UK to the EU will not be subject to the same legal framework and therefore will not benefit from the systems that allow such trade to happen without border controls.15 Instead, the Commission says, “movements of excise goods from the United Kingdom to the EU will have to be released from customs formalities before a [duty suspension] movement under EMCS can begin”. The same will apply in respect of customs duty, import VAT and regulatory standards for goods, meaning excise duty cannot be seen in isolation when considering possible options to keep UK-EU trade—in particular across the border with Ireland—free of the need for physical controls, which is a key Government objective in the trade negotiations with the EU.

5.7It is worth repeating in this respect that the EU’s current legal system for trade in goods, including excise duty, was constructed specifically with the objective of removing the need for border controls on goods moving between Member States. To remove the need for fiscal controls on trade in goods with the EU, the UK therefore either has the option of seeking to stay part of the current system, or successfully agreeing with the EU an entirely separate—and therefore untested—solution.

5.8Faced with this choice, and the time and resources needed to achieve the latter, the Government recently proposed a ‘customs backstop‘ to partially fulfil its commitment to keep the border with Ireland free of customs and regulatory infrastructure after the end of the transitional period (when the UK would fully stay in the Customs Union and Single Market) but before a new comprehensive trade agreement is ready for implementation. Under the Government’s proposal, during this interim period, the UK would effectively stay part of the necessary parts of EU’s customs, VAT and excise regimes (and therefore continue applying unspecified elements of EU law in those areas) until the Government has achieved its ambition of a free trade agreement so deep that no border controls are necessary on any UK-EU trade in goods.16 The Government is apparently still preparing its proposals for alignment on regulatory standards, such as food safety controls, that will also be necessary as part of the backstop.17 It also has not set out its actual long-term proposals for cooperation on excise with the EU after transition and the backstop.

5.9We thank the Minister for his Explanatory Memoranda on the excise reform proposals published by the Commission in May. We note that there are several areas—including the proposed definition of ‘cider’, the technical requirements for the certificates for small producers, and the extension of the EMCS to ‘duty paid’ movements—where the Government has concerns. With respect to the substance of the proposals, we ask him to keep us informed of developments in the legislative deliberations in the Council, and to clarify:

5.10With respect to the Brexit implications of the Commission proposals, we find it extremely concerning that the Minister’s Memoranda make no reference whatsoever to the Government’s proposal for the customs ‘backstop’ in Northern Ireland. This effectively proposes to keep the UK bound, without a legally-binding end date, to unspecified elements of EU excise law necessary for the “common cross-border processes and procedures” that would allow a hard border between Ireland and Northern Ireland to be avoided.

5.11The fact the Government has been unable to specify what elements of the EU’s Excise Directives might be within scope of the backstop gives the appearance that it is yet to arrive at a firm view on this point. As a result of this ambiguity, the European Commission has already dismissed the UK proposal as a “piecemeal application of EU VAT and excise rules” which creates “serious risks of fraud”.

5.12Whatever the EU’s position, we remain extremely concerned that the Government is now itself advocating a policy that requires the UK to continue applying EU legislation on taxation—with respect to bothVAT and excise—for a prolonged period of time after it ceases to be a Member State. All proposals for EU tax law are subject to unanimity in the Council of Ministers, giving the UK a veto—but only until 29 March 2019. If the UK were blocking adoption of proposals in this area, the other Member States now need only wait until 30 March 2019 to circumvent the Government’s veto. While the Government has not explicitly said the backstop would need to include UK application of future amendments to EU law on excise and VAT (even if the UK did not have a vote when they were adopted), this appears an inevitable consequence, given that the whole point of the backstop is to establish “common […] processes and procedures”. The arrangement proposed by the Government therefore risks eroding the UK’s fiscal sovereignty, requiring it to apply EU law on VAT and excise which it could no longer substantially influence or block.

5.13We hope the Government’s upcoming Brexit White Paper will provide more clarity about its long-term proposals for cooperation with the EU on matters of VAT and excise, including how the UK would protect its fiscal autonomy while allowing for border controls of a fiscal nature to be waived on trade in goods with the EU-27.

5.14However, given the current uncertainty about the possibility that EU excise legislation may apply in the UK indefinitely as part of the Northern Ireland ‘backstop’, we retain the proposals under scrutiny. We also draw them to the attention of the Treasury Committee and, with respect to the general implications for companies that trade in excise goods, the Business, Energy & Industrial Strategy Committee.

Full details of the documents

(a) Proposal for a Council Directive laying down the general arrangements for excise duty (recast): (39854), 9571/18 + ADDs 1–3, COM(18) 346; (b) Proposal for a Decision on computerising the movement and surveillance of excise goods (recast): (39847), 9567/18 + ADD 1, COM(18) 341; (c) Proposal for a Council Regulation amending Regulation (EU) No 389/2012 on administrative cooperation in the field of excise duties as regards the content of electronic register: (39840), 9568/18, COM(18) 349; (d) Proposal for a Council Directive amending Directive 92/83/EEC on the harmonization of the structures of excise duties on alcohol and alcoholic beverages: (39836), 9570/18 + ADDs 1–2, COM(18) 334.


5.15Excise duties are indirect taxes on the sale or use of alcohol, tobacco and hydrocarbon oils like diesel and petrol. The aim of these taxes is to disincentive their use, or to provide Governments with revenue to address the externalities that arise from their use. Within the EU, all Member States are required to apply excise duty, but the revenues are retained entirely by the country where consumption takes place (the ‘destination’ principle).18

5.16To avoid distortions of competition in trade between Member States, the EU’s system of excise includes minimum rates of duty (although these have not been updated to account for inflation since they were set in 1992). The current EU legal framework consists of goods-specific Directives that govern alcohol, tobacco and fuel respectively, with an overarching set of common provisions which apply to all products subject to excise duty.19 Before the abolition of border controls on goods moving with the EU when the Single Market was created in 1992, excise could still be levied in one Member State before being exported to another; the existence of customs controls allowed national authorities to verify that goods were actually leaving their territory, and authorise a refund of duty paid (the same system also applied to Value Added Tax on intra-EU supplies).

Intra-EU movements under duty suspension

5.17To achieve a ‘true’ internal market without border controls, the Member States in the early 1990s agreed on a new mechanism of ‘duty suspension’. This allows companies to move excise goods around the EU without paying excise duty up front, improving cash flow. Goods moved between EU countries under duty suspension must be declared to the EU’s electronic Excise Movement & Control System (EMCS) before they are dispatched.20

5.18Only authorised economic operators listed in the System for Exchange of Excise Data (SEED) can make use of this system. Because of the revenue risks of allowing excise goods to be moved before duty is paid, EU law and Member States impose stringent conditions on the granting of authorisations for duty suspension. For example, most storage facilities and movements of excise goods require a financial guarantee, usually provided for by the consignor at the place of dispatch. When the recipient (consignee) in the Member State of destination receives the goods, they submit a “report of receipt” (which should mention any anomalies, such as shortages or excesses in the consignment). At that stage, if there are no reported issues, the sender of the excise goods (the consignor) can then discharge the movement and recover any financial guarantees they had to make for the excise products (in the absence of paying the full duty up front).

Intra-EU movements under duty paid

5.19Businesses also have the possibility of moving excise goods throughout the EU under ‘duty paid’, where excise duties are paid in advance in the Member State of dispatch and then again at destination (at which point the excise duty paid at dispatch can be refunded). National registration or authorisation procedures tend to be simpler than duty suspension, because of the lower fiscal risk, but it costs more up-front and there is an additional administrative burden on companies because of the need to apply for refunds.

5.20This procedure is currently paper-based, and does not make use of the EMCS system to track goods because there is a lower risk of fraud. It uses three copies of a so-called ‘Simplified Administrative Accompanying Document’ (SAAD). After excise duty is paid in the Member State of dispatch, the first copy is kept by the business that initiates the movement of the goods (“the consignor”). The two other copies accompany the goods. At destination, excise duty is paid (again) by the consignee, which keeps the second copy of the SAAD for their records. The third copy is then returned to the Member State of dispatch, used as proof that the initial payment of excise duty can be refunded. The ‘duty paid’ procedure is used in only 3 per cent of intra-EU movements of excise goods, mainly alcoholic drinks, representing only 0.1 per cent (€200 million) of the value of such goods traded between EU countries annually.21 However, the Commission estimates that levels of fraud are much higher proportional to the value of the goods compared to the ‘duty suspension’ procedure tracked by the EMCS.

5.21The harmonised system for movements of excisable goods without customs controls does not apply to trade between the EU and a ‘third country’ (see “Excise duty and the UK’s exit from the EU” below). Such goods must clear customs and regulatory controls—such as food safety controls for drinks22—when entering the EU before they can be released for free circulation and enter either the ‘duty suspension’ or ‘duty paid’ procedure.

Continued risk of duty evasion

5.22The sophisticated EU-wide legal framework notwithstanding, excisable goods moving across EU borders continue to present a “high inherent fiscal risk” for various reasons:

5.23To analyse what further action might be taken to avoid excise duty loss, the European Commission carried out an evaluation of Common Excise Provisions Directive and submitted a report in April 2017.24 The main areas of concern highlighted by the evaluation concerned the improvement of the alignment between excise and customs procedures where goods are imported from or exported to a non-EU country, and the possibility of tracking intra-EU movements of excise goods that have already been released for consumption (i.e. on which excise duty has been paid). The Commission also published a separate report on the excise duty structure for alcoholic drinks, which included a recommendation to consider extending the application of reduced duty rates to small producers of wines and cider.25

5.24The results of the evaluation were largely echoed by a set of Council conclusions on excise adopted by EU Finance Ministers on 5 December 2017.

The Commission proposals

5.25To address the shortcomings identified in the evaluations, the European Commission in May 2018 published four Directives: three to amend the common provisions for excise and related IT-system, and one to modernise the rules affecting excise on alcoholic products (in particular cider) specifically. We have summarised the key points of these proposals below, accompanied by the Government’s position as set out in the Explanatory Memorandum we received from the Exchequer Secretary to the Treasury (Robert Jenrick) on 16 June 2018.

5.26We have also made an assessment of the implications of Brexit for the UK’s system of alcohol, fuel and tobacco duty, including in trade with the EU (paragraphs 5.45 to 5.60).

The common provisions on excise duty

5.27Following the general evaluation of the EU’s excise regime, the European Commission tabled three Directives to amend the common excise provisions, the Excise Movement & Control System (EMCS) and the electronic register for authorised excise operators. These are designed to support trade facilitation and increase the transparency of movements using IT solutions to assist anti-fraud activities.

5.28The first main element of the proposals is to better align customs and excise procedures to ensure consistency across the two regimes. It also seeks to expand EMCS to include movement declarations for goods that have been released for consumption (duty-paid movements, see paragraph 5.17 above). The reason for this was that the current paper-based procedures for ‘duty paid’ movements are considered “out of date, unclear and burdensome” for businesses and tax authorities, and lead to high levels of fraud when excise goods move across national borders within the EU.26

5.29Additionally, the new Directives aim to:

5.30The Minister’s Explanatory Memorandum describes these changes as “highly technical”, adding that the UK’s subject matter experts”will work with the Commission to discuss the detail of the proposals”. Overall, he says, the Government “broadly supports the objectives to improve processes and procedures to manage risks while minimising burdens on legitimate business”, but it will want to ensure in particular that “any extension of the EMCS to cover movements of duty paid goods is proportionate to the risk presented”. The Minister’s Memorandum makes no mention of any Government proposals for future cooperation between the UK and the EU on excise duty matters to facilitate the continued flow of trade in excise goods after the UK leaves the Customs Union.

Specific proposals relating to excise duty on alcohol

5.31The second element of the Commission’s 2018 package of measures on excise duty is a Directive on the rules applicable to duty on alcoholic products specifically. At present, excise duties for alcohol—including beer, wine, and spirits—are regulated through two Directives:

5.32By derogation from the minimum duty rates, Member States are allowed to apply a reduced rate of excise to beer and spirits produced by small independent companies. In addition, denatured alcohol, which has been made unfit for human consumption, is exempt from excise to allow it to be made available at relatively low cost for purposes other than human consumption (but without the risk of its diversion to the consumer market).28 The rules on what constitutes an acceptable denaturing process to exempt alcohol from excise duty vary from Member State to Member State, and there is no centralised system for notifying national procedures for partial denaturing. Duty evasion using (alleged) denatured alcohol is estimated to result in lost tax revenues in the region of €150–200 million (£130–175 million) per year across the EU.

5.33A Commission evaluation of the Directive on the Alcohol Structures Directive found that it was “effective and generally appropriate”,29 but that the large variation in duty levels between Member States provided a “strong incentive for tax evasion”. For example, on still wine, excise duty rates range from zero in 15 Member States including France, to €616 per hectolitre in Ireland30 (the UK’s rate is the fourth highest among Member States at €326 (£288) per hectolitre).31 The evaluation also found that the “burdensome administrative procedures” for both tax authorities and businesses had the effect of preventing some small producers of alcoholic drinks from benefitting from the Single Market as an export opportunity.

Cider duty

5.34The Commission has now tabled a proposal to amend the Alcohol Structures Directive based on the outcome of its evaluation exercise. The key reform affects the potential rate of duty on cider, as the Commission has proposed allowing Member States to apply a reduced rate on cider made by small producers with an annual production of less than 15,000 hectolitres per year. The reduced rate cannot be lower than 50 per cent of the normal prevailing rate of cider duty.

5.35While there is no EU legal minimum excise duty rate for cider (and as such Member States can decide to allow it to be sold duty-free), the Commission notes that “most [Member States] with a traditional cider market apply a positive excise rate”. The UK, for example, typically imposes cider duty of £40.38 per hectolitre. However, where a Member State chooses to do so, it cannot differentiate between large and small producers of cider: the Alcohol Structures Directives only permit the application of different rates depending on the alcohol by volume of the product, not the characteristics of the company that made it.

5.36The new option for a reduced rate of cider duty mirrors an existing option to apply a lower rate of duty for products made by small independent breweries and spirit producers,32 although the maximum production thresholds are different (for example, for beer, annual production can be up to 200,000 hectolitres before the full rate must be applied).33 The maximum production values set by the Directive are ceilings, and individual Member States can therefore decide to apply the reduced rate only to producers with even lower volumes (or not to apply the reduced rate at all).34 For beer, it appears all Member States except Poland, Spain and Sweden have chosen to apply a reduced rate for products of small breweries. The Commission also considered, but ultimately dismissed, the possibility of introducing reduced rates for small wine producers.35

Statutory definition of ‘cider’

5.37To bring the Directive in line with case law of the Court of Justice on different types of ‘fermented beverages’,36 and to define the scope of the new possibility of reduced rates, the proposal also contains a new EU-wide definition of cider (“a beverage obtained only from fermentation of apples and/or pears of between 1.2% abv and 8.5% abv”). The Minister in his Explanatory Memorandum notes that this “is similar to the UK definition, but inclusion of ‘only’ could result in a narrower interpretation”.37

Certification of production volumes for small brewers and cider makers

5.38The Commission has also noted that small brewers (and, under its proposals on cider duty as set out above, cider makers) may struggle to prove they are entitled to a lower rate of duty when selling their products in another Member State, because the tax authorities in the country of sale do not know if the production volumes are below the statutory threshold. Customs authorities in the EU country of sale can request confirmation from the country of origin about those production volumes for a specific producer, but not all EU Member States issue formal confirmation of this kind and, secondly, not all Member States recognise the validity of such confirmation even when it is issued.38

5.39To further facilitate the export of craft beers and ciders by small independent producers from one EU country to another, the Commission has now proposed that national governments should provide small breweries and cider makers with official certification of annual production volumes, and make it easier to prove if are entitled to benefit from a reduced rate of duty applicable in other Member States (where both the maximum production volume and duty rates are likely to be different). The technical detail of this certification system is to be established by means of implementing regulations (statutory instruments) at a later stage.

Other amendments to the Alcohol Structures Directive

5.40In addition to making the above changes relating to duty on cider and beer, the Commission proposal would also:

5.41With the exception of allowing reduced rates of excise duty to be applied to cider and more types of beer, the latest Commission proposals would not affect the minimum duty rates. A 2006 proposal41 to increase the minimum rates of excise on alcoholic drinks (which were established in 1992) in line with inflation was formally withdrawn in 2015 because there was no unanimous support among the Member States for the changes proposed.

5.42The Minister’s Explanatory Memorandum on the Alcohol Structures Directive appears broadly supportive of the proposed reforms. In particular, the Government has welcomed the proposal to allow Member States to apply a reduced rate of beer duty to drinks with of a strength up to 3.5% alcohol by volume (up from 2.8%) and “will consider whether it is appropriate for the UK to take advantage of this option” (reflecting the fact that the new duty rules are due to take effect in 2020, when the UK would still be applying EU law under the terms of the post-Brexit transitional arrangement). With respect to the new option to apply reduced duty to cider made by small producers, the Minister says that the proposed relief “is different from the UK’s current structure” for cider duty and that further analysis will be undertaken when the Commission publishes further information.

5.43Similarly, while the Government “recognises the rationale” for introducing ‘cider’ as a EU-wide definition, he warns that the UK has its own domestic definition “whose interaction must be considered in detail” because the proposed EU definition would reserve the terms ‘cider’ only for beverages made entirely from the fermentation of pear and/or apple juice. The Minister also agrees that a standardised certification system for application of beer and cider small producer reliefs is sensible, “although much will depend on the details to be determined by the implementation regulations”.

5.44As with the proposed changes to the Common Provisions Directive for excise, the Minister’s Memorandum contains no indication of the Government’s long-term proposals for cooperation on excise duty and trade in alcoholic drinks with the EU as and when the UK leaves the common excise system. We have considered the implications in more detail below in the absence of any information from the Treasury.

Excise duty and the UK’s exit from the EU

5.45The impact of Brexit on the UK’s excise duty regime, and its trade in excisable goods with the EU, remains unclear because of the uncertainty about the long-term economic partnership and the implications of the Government’s recent ‘backstop’ proposal (see below).

5.46EU law underpins the UK’s current system of excise duty, in particular with respect to the requirements for cross-border trade in excisable goods with other EU countries. There is, however, a significant degree of national latitude (especially with respect to rates of duty). Leaving the common excise area would allow the Government to apply excise duty below the EU-mandated minimum, and to vary rates for different products or producers not permitted by EU law. However, all EU legislation relating to taxation requires unanimity among Member States—meaning all the existing Excise Directives were adopted with the UK’s support. Moreover, the UK currently has excise duty rates well above the legal minimum rates for all types of alcoholic products, tobacco and fuel. Any regulatory or fiscal gains in this area would therefore appear to be minimal, and the Government’s Explanatory Memorandum does not identify any.

5.47In any event, any new domestic autonomy to amend (or abolish) excise duty rates notwithstanding, the UK’s departure from the common legal system for excise in the EU is likely to have a significant impact on trade in excise goods (both in terms of commercial traffic and travellers’ personal allowance when moving between the two) unless specific mitigating measures are agreed between the Government and the European Commission. At this stage, it is unclear what the Government’s detailed proposals in this area might be, although it has proposed, as part of the ‘backstop’ to keep the Northern Ireland border free of customs and regulatory infrastructure, that the UK as a whole might continue to apply some parts of the EU’s acquis on excise duty for an indefinite period (see paragraphs 5.53 to 5.60 below).

Implications for commercial traffic in excisable goods

5.48The default position once the UK leaves the Single Market and the Customs Union is that the UK will also leave the common excise area. The European Commission outlined the implications of that in a recent ‘Brexit Preparedness’ notice.

5.49In summary, exports of excisable goods from the UK to the EU will no longer be able to benefit from the ‘duty suspension’42 process under the EMCS, which accounts for 97 per cent of all cross-border movements of excise goods within the EU without the use of border controls. Instead, for commercial movements, the UK will have its own process for certifying excise goods have left the country, after which they will be checked by the customs and regulatory authorities at the border of the receiving EU country (at which point they could be placed under duty suspension under the EMCS to be moved to another Member State).

5.50As a result, UK exporters will have to mirror the additional administrative requirements that currently apply to exports of excisable goods to non-EU countries: they will need to lodge an export declaration with HM Revenue & Customs; prove the goods have left the country so that no excise duty has to be paid in the UK; and clear customs, VAT and excise checks, as well as product standard controls, at the point of entry in the EU. The same would presumably apply in reverse for shipments of goods from the EU-27 to the UK, although the Government’s latitude to set UK-specific requirements will depend on the outcome of the negotiations with the EU on a future economic partnership.

5.51As such, trade in excisable goods between the UK and EU countries would become more costly and less efficient than it is at present. Once the UK ceases to apply the legal framework that underpins the tracking of excise goods throughout the EU, any decision not to apply border controls on alcohol, tobacco and fuel entering the UK from the EU would most likely lead to massive duty evasion. There would also be no requirement for the EU-27 to recognise the proposed certificate confirming the production volumes of small brewers and cider makers (to help them prove entitlement to sell their products at reduced rates in EU countries) when issued by the UK authorities. That system of certification would be part of the wider EU excise system, underpinned by binding technical regulations, and ultimately subject to the jurisdiction of the Court of Justice.

5.52The exit from the common excise system would also affect excise goods carried by travellers between the UK and the EU in their luggage. Duty-free shopping could become available again on UK-EU routes, but conversely quantitative limitations would apply to the amount of alcohol and tobacco products that could be brought into the EU from the UK. Any limits on travellers entering the UK from the EU or anywhere else would be for the Government to decide.

Excise controls on imports and the Irish ‘backstop’

5.53The implications described above are the default scenario after the UK leaves the Customs Union and the Single Market (whether on 29 March 2019 in the event of a ‘no deal’ Brexit, or at a later stage under the terms of a transitional arrangement in the Withdrawal Agreement). While the Government has an ambition for a free trade agreement that completely obviates the need for customs, VAT and excise (as well as regulatory) controls on goods moving between the UK and the EU, it has not presented detailed proposals. However, the specific controls that apply to excise goods entering the EU from a ‘third country’ are covered by the Cabinet Office’s recent proposal for the customs ‘backstop’ for Northern Ireland.

5.54In December 2017, the UK and the EU agreed that—in the absence of an ‘agreed solution’—the UK would remain fully aligned with the necessary rules of the Customs Union and the Single Market to keep its land border with Ireland free from regulatory and customs infrastructure. The European Commission proposal for the backstop would keep Northern Ireland, but not Great Britain, inside the EU’s Customs Union and the common excise duty regime. Effectively, this would mean the Northern Irish Executive would apply the Excise Directives (including any future amendments), while goods entering Northern Ireland from the rest of the UK would be subject to EU customs and regulatory controls.43 Rightly, the Prime Minister immediately rejected this proposition.

5.55The Government’s own proposal for the backstop was published on 7 June 2018. It effectively extends the customs, VAT and excise arrangements proposed by the Commission to the whole of the UK. The proposal argues that, to avoid a hard border between Northern Ireland and Ireland, “the application of common cross-border processes and procedures for (…) excise would be necessary, as well as some administrative cooperation and information exchange to underpin risk-based enforcement”. In practice, this would presumably mean the UK would continue to apply the elements of EU legislation on excise duty that both sides considered necessary to allow UK exports of alcohol, tobacco and fuel to the EU (and vice versa) to continue using the ‘duty suspension’ procedure and the EMCS.44

5.56The immediate problem is that the Government’s proposal does not specify which provisions of EU law it considers it might need to continue to apply for the duration of the backstop to make this approach work in practice. Bizarrely, the Minister’s Explanatory Memoranda on the recent proposals for reform of the Excise Directives make no mention at all of the UK version of the ‘backstop’, or how the proposed changes might interact with it. As a result of the Government’s ambiguity about the exact scope of its backstop, the European Commission has already dismissed the UK proposal as a “piecemeal application of EU […] excise rules” which creates “serious risks of fraud”.45

5.57Even if its proposal were acceptable to the EU, the Government is yet to clarify how excise goods would continue to be traded between the UK and the EU after it expires without the need for the customs controls described in paragraph 5.48 above. The Government has said that it ‘expects’ the backstop to function only until the end of 2021. At that point, the new UK-EU free trade agreement would become effective and—by means of some unspecified mechanism—allow excise goods to enter the EU from the UK both without border controls, and (apparently) without the UK applying the necessary EU legislation to participate in the Excise Movement & Control System. As a detailed prospectus on how this might be achieved in a way that satisfies both the UK and the EU46 has not been forthcoming, we hope the Government’s upcoming White Paper on the future partnership with the EU will provide more clarity.

5.58In any event, the very principle behind the Government’s backstop—the continued application of certain provisions of EU law—is worrisome in itself. The reforms proposed to the Excise Directives are due to take effect in 2020, when the UK would still be applying new EU law under the terms of the transitional arrangement (and possibly for a substantial period of time thereafter, under the ‘backstop’). However, it will lose its veto over EU law on taxation on 29 March 2019. Any UK opposition could therefore be overcome by simply deferring adoption of the new Directives until April 2019.

5.59The Government’s original argument was that the long lead-in time for the adoption and implementation of new EU law meant that the policy implications of the transitional period until 31 December 2020 were limited, because any new laws taking effect during that time would have been under discussion while the UK, in the Prime Minister’s words, “would have been able to say whether they would be a rule that we would sign up to or a rule that we would not wish to sign up to”. With respect to the areas of EU law covered by the proposed ‘backstop’, that clearly no longer applies as its duration is not firmly established. We therefore appear to be drifting into a situation where the UK could have to make significant changes to its excise duty regimes—which accounted for £48 billion in tax revenues in 2016–1747—without the ability to opt-out from new EU law in this area. This is also clearly problematic in the context of the pending reforms to EU VAT law, which affects an even larger part of the Government’s tax base.

5.60We wrote to the Financial Secretary on 13 June 2018 to seek urgent clarification of the legislative and financial impact of the Government’s proposed backstop, and we will continue to press Ministers on these issues.

Previous Committee Reports


13 The total £48 billion excise duty tax take for 2016–17 can be divided into fuel (£28 billion), alcohol (£11.5 billion) and tobacco (£8.9 billion).

14 The Commission is also consulting on possible changes to the excise treatment of tobacco products and e-cigarettes, but it has not yet tabled any specific legislative proposals in that area yet.

15 The UK would also be free to apply duty rates below the EU minimum, but given UK duty rates are higher than the EU average there appears to be little appetite for such a move.

16 This is in contrast to the European Commission’s proposal for the backstop, which would keep Northern Ireland only in the common excise regime (and subject to EU law in this area), with the necessary controls on incoming goods from Great Britain to the EU and Northern Ireland shifted to the Irish Sea.

17 The Government’s backstop proposal does not cover regulatory issues such as food safety controls, but acknowledges the need for those issues to be discussed as well.

18 This is contrast to the revenue accrued from customs duties and VAT, a share of which is transferred to the EU budget to fund EU expenditure.

19 Council Directive 2008/118 sets out general arrangements for goods subject to excise duty, including those around production, storage and movement of excise goods. These apply across the territory of the European Union, with the exception of a small number of territories, where its provisions do not apply. 

20 The EMCS supervises the cross-border intra-EU movement and export of excise goods under duty suspension; each movement in EMCS must be declared to the system, before the dispatch of the goods, via an “electronic Administrative Document” (e-AD) and is uniquely identified by its “Administrative Reference Code” (ARC).

21 Commission Impact Assessment SWD(2018) 260, p. 20.

22 For example, for imports of malt beer from a ‘third country’ into the Netherlands, the Commission lists compliance with a variety of EU food safety legislation as a prerequisite for entry: control of contaminants in foodstuffs; control of Genetically Modified (GM) food; health control of foodstuffs of non-animal origin; traceability, compliance and responsibility in food and feed; and labelling of foodstuffs.

23 HM Revenue & Customs, Measuring tax gaps 2018 edition, p. 32.

24 See Commission document COM(2017) 184.

25 See Commission document COM(2016) 676.

26 The Commission’s impact assessment notes that average processing time for SAADs for ‘duty paid’ movements varied between four and eight hours depending on the nature of the consignment. This compares with a few minutes on average for the administration of an EMCS movement. See Commission document SWD(2018) 260.

27 An example of ‘natural loss’ would be the evaporation of petrol while in a tank, which creates discrepancies between amounts of a good dispatched and received.

28 The Commission explains that partially denatured alcohol (PDA) is used for products not intended for human consumption but for which complete denaturing (CDA) is not suitable (i.e. because the intentionally strong smell and taste of CDA make it unusable for products like comsetics, perfumes, inks or paints).

29 See Commission Impact Assessment SWD(2018) 259.

30 A hectoliter is 100 hundred litres, or approximately 0.7 imperial beer barrels.

31 Ireland has two excise rates for still wine, with the higher rate applied to products with alcohol content exceeding 15 per cent. Finland also as a higher rate for wine than the UK.

32 In the UK, cider duty currently ranges from £40.38 to £279.46 per hectolitre depending on the alcohol content and whether the product is still or sparkling.

33 See article 4 of Directive 92/83/EEC. For spirits, the reduced rate of duty can only be applied to distillers who produce less than 10 hectoliters of pure alcohol annually (article 22(1) of the Directive).

34 The European Commission regularly publishes an overview of the applicable excise duty rates in all EU Member States, including reduced rates for small producers. For beer, it appears all Member States except Poland, Spain and Sweden have chosen to apply a reduced rate for products of small breweries. The possibility of reducing excise for small producers of spirits appears less widely-used, with only 11 Member States using it. For beer, it appears all Member States except Poland, Spain and Sweden have chosen to apply a reduced rate for products of small breweries

35 The Commission Impact Assessment notes that small wine makers are not included in the proposal because a) many Member States do not charge wine duty and as such there would be no tax benefits; and b) stakeholders expressed concern that the introduction of variable rates for wine in this way “could result in the subsequent removal of the zero rate, an outcome which would negatively affect all businesses, both large and small”. (See Commission document SWD(2018) 259, p 18.

36 See for example the judgement of the Court in case C-150/08.

37 The UK’s domestic definition of ‘cider’ under the Alcoholic Liquor Duties Act 1979,is: “cider or perry of a strength exceeding 1.2% alcohol by volume (ABV) but less than 8.5% ABV obtained from the fermentation of apple or pear juice without the addition at any time of any alcoholic liquor or of any liquor or substance which communicates colour or flavour other than such as the Commissioners may allow as appearing to them to be necessary to make cider or perry”.

38 In the UK, for example, small brewers from other Member States self-certify and controls by HM Revenue & Customs are risk-based, whereas in France they have to submit a one-off set of documents to the tax authorities to prove their production volumes.

39 Plato refers is a measurement of how much beer has been mixed with non-alcoholic additives or beverages; its application to determine the relevant excise duty (which, under EU law depends on alcohol content) varies between the Member States that use it. Degrees Plato are not used in the UK.

40 These obsolete exemptions from excise duty were for certain ‘concentrated malt beverages’ and certain ‘aromatic bitters’.

41 See Commission document COM(2006) 486.

42 See paragraph 5.17 for more information on the ‘duty suspension’ process.

43 Draft Withdrawal Agreement (19 March 2018), “Protocol on Ireland/Northern Ireland”, p. 108.

44 The Government proposal has a legal operative text reading “The provisions of Union law on excise duties listed in Annex 2.4 to this Protocol shall apply to and in the United Kingdom”. However, no proposed contents for this ‘Annex 2.4’ are provided, and as such it is unclear which provisions of EU excise legislation the Government envisages might continue to apply to the UK if the backstop became operational.

45 Slides on UK technical note on temporary customs arrangements (11 June 2018).

46 It is worth noting that the EU’s current system, including the minimum rates combined with the Excise Movement & Control System, was created precisely to allow for border controls to be abolished within the EU. If the UK is not seeking continued alignment with the EU in this area, the Government must either propose an entirely new—and therefore untested—technological solution, or propose a mechanism to avoid the need for border controls in relation to excise that has already been previously considered but did not have the support of all Member States.

47 The total £48 billion excise duty tax take for 2016–17 can be divided into fuel (£28 billion), alcohol (£11.5 billion) and tobacco (£8.9 billion).

Published: 3 July 2018