Duty-bound relationships

15 October, 2010

In July, HM Revenue & Customs officers seized thousands of bottles of illicit alcohol from drinks shops in Bournemouth, Dorset. Fourteen off-licences had been selling stock on which no UK duty had been paid.

ater that month, HMRC seized nine lorry loads of smuggled wine and beer in Thurrock, Essex. Then in August, a raid on Newcastle drinks shops found four were selling suspect alcohol. Police applied for licence reviews and the shop owners now face losing their livelihoods.

HMRC spokesman Bob Gaiger says alcohol duty fraud “has a devastating impact on legitimate retailers trying to compete with those operating on the black market”.

Alcohol duty fraud is a huge problem – HMRC estimates it lost £1 billion last year in unpaid excise duty and VAT.

Most illicit alcohol reaches the UK market through inward diversion fraud. Criminal gangs warehouse alcohol under duty suspense in Continental Europe. The alcohol is diverted back to the UK, using forged documents, no UK duty is paid, and stock is sold on to wholesalers or direct to shops.

Suppliers have a key role to play in helping prevent duty fraud – if they do nothing, alcohol can easily fall into the hands of criminals. But progress has been piecemeal. Spirits suppliers have a formal agreement in place with HMRC through trade associations. However, there is no such sector-wide agreement for the brewing and wine sectors – attitudes have varied from company to company. But multiple pressures are encouraging suppliers to look more closely at their internal systems and external relationships.

Customs has pressed for a closer relation­ship with suppliers, putting this at the heart of its alcohol fraud strategy. And the Federation of Wholesale Distributors is now calling for a duty stamp scheme for beer. Chief executive James Bielby says the government should take immediate steps to tackle the cost of beer fraud, which at £700 million a year is twice that of spirits fraud.

There are strong business reasons for cracking down on alcohol fraud. John Heynen, sales director at Molson Coors, says: “Fundamentally we are a part of a large organisation and we’re about building our brands with our domestic customers and consumers. But we end up talking about duty fraud with them a lot. So duty fraud isn’t helpful when you’re trying to build your brand – it’s not what we’re about and gets in the way.”?He adds: “While we’re ultimately not responsible for retail prices, the existence of duty fraud can put a degree of downward pressure on pricing.”?Constellation Wines supplies top-selling brands Echo Falls, Kumala and Stowells, all of which are affected by duty fraud “in a number of ways”, according to Tom Wallis, who is responsible for sales to cash and carries in Europe. He agrees that duty fraud has an adverse effect on branding and pricing. “It creates an inconsistent marketplace and gives a focus on price as opposed to marketing and brand value.”?Wallis adds: “With revenue under pressure due to duty fraud it is inevitable the Treasury will look to other means to raise receipts, namely increasing duty rates. Therefore it’s in all our interests to place duty fraud high on the agenda.”?Some suppliers have introduced strict measures. Molson Coors monitors customer demand against expectation. “Having that information makes it relatively easy to spot unusual spikes in demand,” says Heynen.

Delivery methods can also improve things greatly. First Cape wine supplier Brand Phoenix ships 80% of its stock direct to major customers, avoiding the less secure excise warehouse and wholesale route. “Shipping on a free-on-board basis is the easiest, smartest, most bullet-proof option,” explains director Steve Barton.

Closely monitoring orders from bonded warehouses – or those purporting to be from such businesses – can also make a difference. Heynen says Molson Coors has turned down a lot of requests for under-bond sales.

Other suppliers say the customer relationship is key. Charles Elms, director of Free Run Wines, says: “We only operate on an ex-cellar basis, working in partnership with reputable customers and suppliers, which minimises the risk factors within our supply chain.” Wallis says the majority of its customers are established businesses, and it has systems in place to ensure that new customers are legitimate.

Major brewers in the UK market are exploring a collaborative approach to tackling duty fraud, meeting regularly along with HMRC. Heynen says: “One of the things we’ve been discussing is getting a real understanding of the supply chain for a product. If we can draw a fence around that we can squeeze certain points in the supply chain. But competition law makes it quite a challenge.”?So could a memorandum of understanding – like the one agreed between HMRC and the spirits industry – emerge? “That might be one route forward,” says Heynen. “I think there’s more appetite in the industry than there was previously. I suspect we might move towards something along those lines. I expect most of my competitors would share the same intent for the domestic market.”?Heynen is open-minded about the beer duty stamp scheme proposed by the FWD, even though AB Inbev and the British Beer & Pub Association have dismissed the idea as expensive and unworkable.

“Implementing such a scheme would provide us with some significant challenges,” he says. “First, I’d want to know more about the success of HMRC’s spirits duty stamps scheme.”?There are no signs yet of collaborative efforts in the wine sector. But many suppliers say they are working closely with retailers, wholesalers and industry associations – and there is an appetite for a more collective approach.

“We have got to work together more,” says Brand Phoenix’s Barton. “Under the last government, everyone was a villain and businesses were put under all kinds of pressures.

“The question everyone will be asking now is whether HMRC is looking to work with us, or is it looking to spot any kind of problem that exists? But we should invite it to work together with us more; it shouldn’t be a battle between genuine businesses and HMRC.”

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