Select Committee on Treasury Minutes of Evidence

Memorandum from HM Customs and Excise



  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.


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.


  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.


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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