Brexit – tax on consumption – principle must be protected

Here’s an interesting article from one of our colleagues, Alan Powell, a specialist excise duties consultant. We refer all of our excise work to him.

At the very moment Britain prepared to vote for Brexit, the EU court (CJEU) was giving a massive boost to the beleaguered UK alcohol excise industries by confirming a simple but massively significant principle – excise duty is a tax on consumption. This might seem obvious and trite but HMRC has always refuted this principle because of its beneficial consequences to the industry and taxpayers.

Alan Powell, specialist excise duties consultant, said: “The plain legal facts are now clearly spelled out and must be protected post Brexit. In summary:
Excise goods must be produced in a tax warehouse and there must be a system to suspend the duty (i.e. a relay system of tax warehouses);
Since excise duty is a tax on consumption, it is necessary that the duty is suspended as near to the real consumer as possible;
If goods do not physically leave tax warehouse/duty suspension, there is no availability for consumption and no duty liability, even for technical irregularities.
Powell explains: “The UK has failed to apply these principles in most cases and, in terms of duty charged for “technical irregularities” has been unlawfully plundering alcohol businesses for many years. HMRC must immediately recognize and implement EU law correctly.

Powell goes on “The best principles of EU law for excise duty in UK law must be confirmed during the Great Repeal Act, especially that excise duty is a tax on consumption. But Powell warns “If industry does not press its case, there is a risk – as evidenced by HMRC’s latest attacks on the alcohol sector – that HMRC will look to drive the duty point further back for alcohol products as they have for oil and tobacco and become, in effect, an “early” tax and burden on business.”

Background – excise as a consumption tax

Under EU law, excise duty is liable on eg alcohol following production within, or importation into, the EU but the duty is suspended by holding the goods in a tax warehouse (production premises (eg brewery, cider makers etc) or general “bond”). The duty is not due until the goods are released for consumption and physically depart the tax warehouse.

HMRC has always argued that “consumption” doesn’t mean consumption by a consumer but this is not true and proven to be the case last year (2016) at the CJEU.

The CJEU case C‑355/14 Polihim-SS’ EOOD (“Polohim”) of 2 June 2016 has now ruled incontrovertibly that excise duty is a tax on consumption (per recital 9 to Directive 2008/118/EC as also found in the BP Europa SE case (also 2016)).

In looking at what a tax on consumption means, Polohim also builds on foundations set out in previous case law that identifies that whilst excise goods have a liability to duty following production or importation, there is a structure of duty-suspension (ie tax warehouses) that enable the duty liability to be suspended and that the duty, as a tax on consumption, should be suspended as near as possible to the (final) consumer.

Moreover, Polohim determines that “so long as the goods in question remain in the tax warehouse of an authorised warehousekeeper, there can be no consumption, even if those goods have been sold by that authorised warehousekeeper”.

UK law and HMRC policy imposes arbitrary duty points and restrictions on duty suspension in clear breach of EU law and denial of fundamental rights.

Post Brexit

It is vital that the best principles of EU law are not only carried over in the Great Repeal Act but confirmed clearly in UK law. The risk of not being vigilant is that HMRC unpicks good law and legislates domestically to deny that excise is a tax on consumption and to withdraw alcohol duty suspension which they cannot do under existing fundamental EU law. Nevertheless, there are indications this is being mooted at high level. HMRC’s end game may be to roll back alcohol duty suspension when they already have severe and punitive powers (latest being AWRS).

HMRC actions – Business under attack – burdens and lack of proportionality

The gross alcohol tax gap figure is said to be £1.8 billion and there has been significant duty fraud in popular UK beer brands and some wine products. The fraud figure is disputed by some in the trade but illicit diversion – mainly smuggling – has been a problem in supply chains made worse by the failure of the electronic movement and control system (EMCS) to fight the fraud as was its express intention. Paradoxically, EMCS has inadvertently made the fraud worse.

Due to the failure of EMCS and inability of revenue authorities to effectively combat the fraud, HMRC has instead been requiring business to undertake ever more onerous auxiliary duties, including risk assessment and due diligence of supply chains which are already highly regulated and many businesses are now complaining of “compliance fatigue”. Worse, HMRC is now requiring businesses to “police the supply chains” or risk revocation of approval if not. This is a consequence of how HMRC is applying the due diligence condition imposed upon business. The legal test for due diligence is simply to assess the risk and take (appropriate) mitigating action but HMRC is instead requiring a “blunderbuss” approach to be taken by business, which misses the point of due diligence entirely.

Furthermore, HMRC has been taking disproportionate action against any minor breaches of the rules. it is becoming evident that HMRC has either lost sight of its need to guard against acting disproportionately or doesn’t care. Either way, the consequences for business are perilous. This led to the most senior Tribunal Judge, Mr Colin Bishop censuring HMRC in such a case (United Wholesale) earlier this year. Mr Bishop’s decision records his mounting astonishment at HMRC’s failure to act proportionately and his displeasure at HMRC’s reviewing officer acting in a way that was blinkered and unfair. But HMRC has not heeded the lesson and is continuing its actions in this vein, which in turn is putting business, jobs and revenue at grave risk for no benefit whatsoever.

Contact Alan at