Showcasing the British spirit

Distillery start-up options, benefits and pitfalls

There are a several options and routes to produce and distil or redistil spirits but first the terminology needs to be sorted out and by reference to UK law.

Distillation Distillation is the production of spirits from a fermented liquor. It also includes other processes, specifically ethanol extracted form ethylene but – according to legal advice I obtained when I was running HMCE spirits policy - not freezeconcentrating a fermented liquor.

Distillation requires a distiller’s licence from HMRC and approval of the plant and process to be used. HMRC retains discretionary powers to refuse a licence to an applicant where the largest still to be used is less than 18 hectolitres and, until 1996, HMRC policy was to refuse licences in such circumstances.

I changed that policy such that HMCE/HMRC would entertain applications accompanied by a credible business plan and the revenue was not compromised and this is the established case for most “small distillers” (although HMRC seemed unaware of that policy change for years, despite it being stated clearly in their internal “manual”). Most licensed and approved distilleries also have an associated excise warehouse approval because the law requires that spirits produced and accounted for in the distillery must be immediately removed “to warehouse”. This brings the spirits into the excise warehousing regime, which is very strictly regulated, but permits a wide range of standard operations to be carried out such as maturation and subsequent operations (reducing, bottling etc) and also the rectifying and compounding of spirits (re-distillation of spirits with or without materials that communicate flavour or colour to the spirits).

Rectifying and compounding of spirits can be carried out on spirits produced by the licensed distiller but may also be carried out in the warehouse on spirits made elsewhere, such as grain neutral spirits to produce gin or other flavoured spirits.

HMRC may authorize an applicant as an excise warehousekeeper under s92 of the Customs and Excise Management Act 1979 under what is called the “trade facility” policy criterion to carry out any operations including the rectifying and compounding of spirits. A licence for the excise trade of rectifier/compounder is also required but the Commissioners have no powers to refuse the licence, so it is really just a nicety; the real substance is the warehouse approval. The benefit of operating in excise warehouse is cash-flow; the duty remains suspended from supply of GNS to finished product (as does the VAT in effect) and duty is not liable on losses of spirits in warehouse due to “natural waste or other legitimate cause” (ie genuine production losses or accidents).

HMRC also requires observance of the “due diligence” condition of section 10 of Notice 196, which is essentially to guard against becoming involved in supply chains susceptible to alcohol (inward diversion) fraud. Since HMRC has stated repeatedly to industry, Parliament and the media there isn’t any focus on spirits as a fraud risk, and illustrated that why spirits isn’t a fraud risk in a submission to the Court of Appeal last year, it raises the question to any sane person – what due diligence is required to mitigate a risk that doesn’t exist?

Application to operate an excise warehouse

There is no minimum “entry” level for a trade facility warehouse, but the applicant has to be “fit and proper” and have a credible business plan. For SMEs, it is unlikely a premises guarantee is required, which is another benefit. The downside is the duty-suspended regime is severe and draconian: often even genuine errors of no revenue risk can create an inadvertent duty point which then triggers an immediate liability to the duty (actually, the goods are liable to be sized as forfeit to the Crown but may be restored to the owner, subject to conditions which is usually full payment of the duty). There are also ferocious associated civil penalties for “wrong doing” (schedule 41 to the Finance Act 2008 if you want to peer into the abyss…) That said, HMRC and the industry last month (June 2020) commenced work on modernization and simplification of the alcohol regimes and the severity of the current legal framework will be subject to that review.

Rectification and compounding of duty-paid spirits

Finally, it may be simpler to rectify or compound spirits on a duty-paid basis (ie the supplier of the spirits has paid the duty to HMRC and passes that amount of duty on in the invoiced price, plus VAT). All that is required is a licence from HMRC to rectify/compound the spirits and the “making of an entry “ ie a submission to HMRC of a list of the premises/rooms and the kit to be used (archaic and unnecessary but HMRC saw fit to retain that law in 2012).

For all duty-paid spirits of 30%+ abv released on sale in the UK in retail containers above 35 cl, the law requires that duty stamps be affixed to the container or incorporated in the labelling. This legal requirement was a misconceived response by HMCE to a duty fraud that hasn’t existed since 1998 and wouldn’t work anyway (as HMCE/HMRC knew full well even when planning the legislation). It is utterly pointless and is also subject to current industry lobbying for removal from the law.

Alan Powell

Alan Powell is a specialist excise duties consultant, formerly a Policy official within HMCE’s HQ teams. He is excise duties advisor to the Chartered Institute of Taxation, honorary advisor to the UK Warehousing Association and founded the British Distillers Alliance as a conduit for consultation with, and representation to, Government bodies and to assist and advise on technical matters.

For further information: www.britishdistillersalliance.com