Excise duty is payable on the production or importation of alcoholic beverages. Presumably most inventory of HOK has been charged with excise duty either at the production or importation stage.
Article 7 of EU council directive 2008/118 provides that importing alcoholic products into any EU member state will give rise to excise duty in that importing state. Excise duty is payable by the exporter rather than the consumer.1 Thus if HOK distributes 100 bottles of wine to a German restaurant owner excise becomes payable in Germany by HOK. In that scenario it would become apparent that excise has occurred at two stages in the supply chain:
- Firstly, on the invoice from HOKs supplier to itself, and;
- Secondly, on the invoice from HOK to its German customer.
There are 'drawback' provisions in article 33 of the EU council directive which allow for exporters like HOK to claim back excise duty on exported items provided that excise duty has been fully paid in the destination country. This measure is aimed at eliminating double taxation.
It is important to remember that EU laws are given jurisdiction in the UK by local UK legislative provisions appointing and confirming their authority (hence why 'brexit' is possible via a reversal of those provisions). With this in mind article 9 of the EU council directive should be considered which states:
"Excise duty shall be levied and collected and, where appropriate, reimbursed or remitted according to the procedure laid down by each Member State." (Emphasis added)
Thus, not only is the EU directive implemented into local law of each member sate, independent local procedures can be implemented alongside the EU directive in order to aid the smooth running of excise duty collection. Local-specific rules can include 'monitoring procedures' which are administrative tasks that facilitate the process excise duty collection, or more serious 'correctness criteria' (the old wording of the law - but still relevant) aimed at preventing misuse of the drawback scheme. For example one requirement in UK excise law is that:
"Before removal to warehouse, the goods and the warehousing advice note shall be available for inspection by the Commissioners, at any reasonable time, for not less than two clear business days following the day upon which the notice mentioned in sub-paragraph (a) above was received by the Commissioners" (Section 8(1)(c) in Part III of the Excise Duty (Drawback) Regulations 1995) (Emphasis added)
HOK had breached the above rule on a number of occasions (albeit for reasons out of their control) resulting in a disallowance by the HMRC of excise rebate to the value of around £100,000. They appealed against that decision to the Upper Tribunal on the grounds that:
- The first ground: That the decision by the HMRC was contrary to precedents outlined in EU case law. In particular the test set out in Scandic (2013 EUECJ C-663/11) where a Romanian distillery was denied a rebate of excise duty by its local tax authority because the company didn't comply with local regulations requiring a 'notification' to be sent to authorities prior to exportation which was not given. The CJEU ruled in favour of the distillery in that case by drawing a distinction between local 'monitoring procedures' and local 'correctness criteria', ruling that the sending of a notification prior to exportation is a 'monitoring procedure' which fails to trump the EU directive's overriding theme being that where an exporter has paid duty in both countries they have a fundamental right to claim it back in the country of origin.
However, it was also relevant that the court implied that genuine 'correctness criteria' are a legitimate imposition on European businesses providing they are in line with the overall theme which can include protecting it's integrity with anti avoidance measures.
On this point HOK contended that the facility inspection criteria was a 'monitoring procedure' whereas the HMRC contented it was a 'correctness criterion'. - The second ground: That the decision by the HMRC was contrary to the principles of proportionality and fiscal neutrality and a penalty was more appropriate than an outright denial of a claim.
The Upper Tribunal ruled in favour of the HMRC for the following reasons:
"We know from Scandic that the correctness criteria referred to in Article 22(3) must relate to the condition(s) for reimbursement, and that the concept of “correctness criteria” may not be interpreted in a way which allows a new or different condition to be added, if and to the extent that condition would fall outside the ambit of the directive ([35], [36] of the Judgment). Thus far, we agree with [BOKs] argument that there are different types of measures or qualifying requirements which can be imposed by the Member State, some of which attach to the substance of the claim (in the context of Article 22(3) these can be seen to be “correctness criteria”) and some of which are merely procedural (which in the context of Article 22(5) can be seen as “monitoring procedures”); and that a claim cannot be refused simply because the taxable person is in breach of one of the latter category of procedural requirements. This analysis squares with the Ecotrade cases which distinguish between substantive requirements on the one hand (non-compliance with which can result in refusal of the claim) and formal requirements on the other (non-compliance with which cannot result in refusal of the claim, but can be penalised in some other proportionate manner). Further, this analysis would appear to be at one with the Advocate General’s opinion in Scandic, where at paragraph 44 she distinguishes between correctness criteria which can entail a refusal of reimbursement, and involve a “plausible risk that the duty will not be correctly collected” on the one hand, and procedural rules imposed for reasons of administrative expediency which may only give rise to a proportionate penalty (not refusal) on the other."2
"We conclude that the inspection facility rule is a substantive requirement, which attaches to the first condition for making a claim under Article 22(3) (or its successor under the 2008 Directive). It is a “correctness criterion” which can lead to refusal of the claim if it is breached, within the language of Article 22(3), and the judgment of the Court in Scandic. It is a measure which permits the Member State to establish that the substantive requirements have been satisfied, adopting the language of the Ecotrade cases. It is not merely procedural, formal, or implemented to achieve administrative convenience."3
"We conclude that the objective of the inspection facility rule is to enable the Commissioners to inspect the goods in question before dispatch, in order to prevent tax fraud by false claims. It is an anti-avoidance measure."4
"Directives confer on Member States the power to lay down the methods and procedures by which taxable persons within their territory are to claim drawback. As we have already said, the Member States have a free hand in devising those methods and procedures, subject to compliance with the overarching principles of EU Law (including the principle of proportionality and fiscal equality, cited by the Claimant). The prevention of possible tax evasion and avoidance is also an established principle of EU law, reflected in the Ecotrade cases and in many, many other tax cases in domestic and European Court case law (see, for examples within the cases we have examined above, Equoland [28] and EMS Bulgaria [69]). Consistently with that principle, the Member States may prescribe rules to combat a perceived or anticipated risk of avoidance or evasion (assuming the perception or anticipation of risk is coherent and rational). Such perceived or anticipated risk of avoidance is sufficient justification for an anti-avoidance rule, and is what the Court meant when it used the word “ascertained”. The Claimant’s argument to the contrary is absurd, and would leave Member States in the forlorn position of not being able to prevent evasion and abuse through a robust system which incorporated generic anti-avoidance measures; they would be able to invoke anti-avoidance rules only as and when there were grounds for suspicion arising out of a particular claim. As we have discussed above, there is extensive evidence that the United Kingdom perceives there to be a risk of tax loss in relation to drawback generally. Whether such a risk attaches specifically and individually to the Claimant’s claims is beside the point. The United Kingdom’s rules are designed to enable the correct amount of tax to be collected from (and repaid, as necessary, to) the whole body of taxpayers, and the rules correctly incorporate generic anti-avoidance measures.."5
Thus the HMRC successfully defeated the appeal. It is important for exporters to ensure their cargo is not shipped out prior to the end of the HMRCs two day inspection period.
Notes
Case [2016] UKUT 195 (TCC): http://www.bailii.org/uk/cases/UKUT/TCC/2016/195.html
1. Article 8(1)(d) of EU council directive 2008/118.
2. p55
3. p60
4. p52
5. p64
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