"Although in this case the tribunal considered that HMRC's decision to revoke the company's approval was unreasonable, the case shows how important it is for alcohol traders to take the due diligence condition very seriously," said Jake Landman, a tax disputes expert at Pinsent Masons, the law firm behind Out-law .com. "Removal of approval prevents the business operating in the alcohol market, which could have very serious ramifications."
Excise duty is payable on alcoholic drinks. However, the payment of the duty may be suspended where the goods are deposited in a warehouse approved by HMRC which is, managed by an HMRC approved warehousekeeper. HMRC will only approve those who can show they are "fit and proper to carry out an excise business". HMRC may at any time "for reasonable cause" revoke the approval or registration of a warehouse or vary the terms of any approval.
"In our view, having regard to the purpose for which the notice is given force, 'fit and proper' persons does not mean those who are fine, upstanding or well-connected, but those who demonstrate behaviour of the type likely to assist, and not to hinder, the proper administration, collection and protection of excise revenue," judge Hellier said.
A due diligence condition requires an approved warehousekeeper to carry out checks and to evaluate the information it receives to identify the risk that an activity has a connection to excise fraud, and where such a risk is identified to take mitigating action.
"The steps to be implemented to meet the due diligence condition place a considerable burden on excise businesses. They require clear policies and processes to be put in place, regular training and guidance to be provided to staff and robust reporting lines and record keeping obligations," Landman said.
HMRC's decision to revoke Kammac's approval was partly as a result of due diligence failures by Kammac in relation to alcohol stored and dispatched for a company called Panache, which claimed to be a Hong Kong subsidiary of an Indian based multi-national group buying alcohol in the UK for supply to South Asia.
Referring to an Italian prosecutor's report, however, the tribunal said it appears that Panache’s transactions were "part of a large scale organised pan-European criminal conspiracy" and the goods despatched from Kammac's premises did not arrive at the declared destination.
HMRC discovered that the spirits stored by Kammac for Panache had intact 'duty paid' stamps on them. Kammac had not opened the cases and the tribunal concluded that it had previously despatched spirits to an overseas destination duty suspended but with duty paid stamps on them in breach of the requirement to obliterate duty paid stamps before despatching goods to an overseas destination. Duty paid stamps would mean that the spirits could be sold in the UK without further excise duty being paid, even though no duty had been paid. The potential duty on the despatches Kammac had made in behalf of Panache was approximately £4.5 million.
The tribunal said that the due diligence carried out by Kammac on Panache "failed comprehensively". Kammac had commissioned a report on Panache from Dun & Bradstreet but although the report identified several causes for concern, these were not given any serious consideration by Kammac. The tribunal said that Kammac had acted carelessly.
"Unsurprisingly the tribunal robustly rejected the assertion made by Kammac’s former due diligence provider that the due diligence requirements linked to approvals were not for the purposes of assisting in the prevention of excise fraud," Landman said.
However, the tribunal considered that a number of important facts had not been taken into account by the HMRC officer in her decision to revoke Kammac's approval.
After HMRC's decision to revoke its approval, Kammac had brought in accountancy firm PwC to prepare a report on the gaps in its due diligence procedures and to propose a new system. Although HMRC accepted that the procedures recommended by PwC would comply with HMRC's requirements, the HMRC officer doubted Kammac's ability or willingness to comply with the procedures because of the delay in dealing with HMRC's concerns. The tribunal said that the delay was because of advice given by the previous adviser and it pointed out that some of the facts relied upon by HMRC in relation to breaches of the rules were incorrect.
The tribunal queried why HMRC had not considered imposing a condition on Kammac's approval requiring for example a weekly audit by PwC of the company’s due diligence.
"Any new decision should address whether revocation would be a proportionate response (in the sense that it was not the least which could have been imposed to achieve the aim of the protection of the revenue) if such a condition might be imposed," judge Hellier said.