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Alcohol Sellers Caught By Due Diligence

March 30, 2021 | Silver Shemmings

Due diligence, in relation to alcohol duty fraud, became a condition of approval on 1 November 2014 for breweries approved to trade in duty suspension under section 41A of the Alcoholic Liquor Duties Act 1979 and on the following approvals registered under section 100G of the Customs and Excise Management Act 1979:

• Authorised Excise Warehousekeepers
• Registered Owners of Goods (within an excise warehouse)
• Registered Tax Representatives (this applies to Northern Ireland businesses only)
• Registered Commercial Importers (this applies to Northern Ireland businesses only)
• Temporary Registered Consignees (this applies to Northern Ireland businesses only)
• Registered Consignees (this applies to Northern Ireland businesses only)
• Registered Consignors (this applies to Northern Ireland businesses only)

Due diligence also became a condition of approval on 1 January 2016 for businesses approved under ALDA 1979 part 6A section 88c as wholesalers of alcohol under the Alcohol Wholesaler Registration Scheme (AWRS)

It is aimed at those who are dealing in alcoholic liquor goods.

What Is Due Diligence?

Due diligence is the appropriate reasonable care a business exercises when entering into business relationships or contracts with other businesses. It is a series of checks to identify and manage any risk that a business may have within a transaction or supply chain. These risks could be anything from not being paid to handling illegally sourced goods. The approach will differ from business to business, with different tests applied, depending on where the business is within a supply chain and the nature of the transactions under consideration.

Due diligence is not static but an ongoing, dynamic process that develops as the relationship between the trading parties evolves. Reasonable care is using sound judgement or acting in a sensible manner. The actual due diligence carried out by a business should be proportionate to the level of risk it identifies.

What Are The Conditions?

The due diligence condition is an anti-fraud measure to help address UK alcohol fraud. To introduce illicit goods into legitimate markets, criminals capitalise on the demand for popular brands, and use complex supply routes (with sophisticated finance, procurement and logistics arrangements) to mask the origin of goods.
The due diligence condition places a requirement on excise registered businesses at all key stages of a supply chain to:

• consider tax fraud risks
• make checks in relation to those risks
• establish the level of risks and whether they are acceptable to their business
• take effective action to reduce exposure to fraud risks identified

This ensures that due diligence is carried out within each alcohol supply route. Where registered businesses identify and react appropriately to fraud risks, this will help reduce criminals’ access to, and restrict avenues for onward sale of, illicit goods. It also reduces the risk of legitimate businesses unwittingly handling illicit goods. Therefore, risk assessments and due diligence checks must be carried out to a reasonable standard across the sector. Where it is not, you should react robustly and consistently.

Businesses must carry out due diligence to minimise their exposure to risks of goods they trade with or handle being linked to alcohol fraud. They must carry out timely, reasonable and proportionate checks on intended transactions (and supply chains) before entering into new agreements. They should also carry out regular checks on existing arrangements they have. Where businesses properly carry out due diligence this will help ensure that:

• they have a good understanding of risks and overall market for the goods traded
• they have a good knowledge and understanding about their customer
• their customers will pay for goods on time
• goods held out for sale physically exist and will arrive if ordered
• sellers have legal ownership of goods and are able to sell them on
• goods are as described and not counterfeit
• goods are of merchantable quality
• taxes and duties are correctly accounted for
• businesses holding excise approvals do not become unwittingly liable for duty or penalties
• risk of fraud or evasion is minimised

Each business should have appropriate management controls for these checks. Where a third party carries out due diligence checks, the registered person remains responsible for ensuring that adequate due diligence and risk assessment procedures are in place.

A key element in tackling alcohol fraud is to ensure that the excise due diligence condition is applied properly and consistently across the sector, from production to consumption. Although a large number of businesses will carry out reasonable due diligence, others may choose to ignore risks or carry out cursory checks to appear compliant. We should challenge robustly those who are not applying due diligence properly, reminding them of their obligations. It is these businesses who may, unwittingly or otherwise, become involved with the illicit alcohol trade. Of particular risk are those in key positions, such as warehousekeepers, and those trading in significant volumes of excise goods.

What Happens If I Do Not Carry Out Due Diligence?

You may be held liable for the net tax unpaid on those goods where you (a VAT-registered business) receive a taxable supply from another VAT-registered business and:

• the supply is of specified goods
• you knew or had reasonable grounds to suspect that the VAT on the supply, or any previous or subsequent supply of those goods would go unpaid to HMRC
• you’ve received a notification of liability under the joint and several liability rules

How Will HMRC Notify Of Joint And Several Liability For Unpaid VAT Of Another

HMRC will send you a notification letter if:

• you have bought or sold a quantity of the specified goods
• the transaction took place within a supply chain where VAT was unpaid by another supplier in the chain
• HMRC believe it can show that you knew or had reasonable grounds to suspect that VAT would go unpaid

Before the issue of a notification letter, each case will be independently reviewed and authorised by a central team within HMRC to make sure that the case is an appropriate one for the joint and several liability provisions and that there is sufficient evidence on a balance of probabilities to show the requisite knowledge or reasonable grounds for suspicion.

What You Must Do When You Get A Notification Letter From HMRC

A notification letter is to inform you that HMRC considers you may be jointly and severally liable for the unpaid net tax. HMRC will send a notification letter to each known business in the chain of supply that it considers may be jointly and severally liable for the unpaid tax.

The letter will be clearly headed ‘Notification of joint and several liability’ and HMRC will explain the reasons why it considers you may be jointly and severally liable. You will have the opportunity to demonstrate that you did not know nor have reasonable grounds to suspect that VAT would go unpaid.

You will have an opportunity to seek an independent review about other factors which you feel HMRC should consider or 21 days from the date of the notice of liability to inform the tribunal of your appeal.

We work as HMRC agents for UK VAT registered businesses to assist them with all their tax affairs, saving them valuable time and money to concentrate in furthering their trade. We also step in to assist businesses who have been unfairly treated by HMRC, despite meeting all the principles of fit and proper test, in law and in fact.

If you have any questions concerning due diligence, you can contact Monty directly at montyjivraj@silverllp.com.

Author Monty Jivraj is Head of Tax Investigations and Disputes and has worked with individuals and business in the UK for twenty years to help them understand tax laws and save millions of pounds. His business operations background allows him to quickly understand your business model and how the UK and EU tax laws apply to you.

Through extensive work with Her Majesty’s Revenue and Customs (HMRC), he can easily translate and advise on complex HMRC policies, public notices, decisions to deny input tax, fraud investigations and tax assessments.

At Silver Shemmings Ash, we provide seminars and training alongside our core activities in contentious and non-contentious matters. The purpose of these is to facilitate a greater knowledge and understanding of construction and property law. There remains a considerable lack of training in such areas for companies and this is an issue which we are looking to address


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