SHOWCASING THE BRITISH SPIRIT

Approval by HMRC of new distillers – the chicken and egg paradox

So – you want to apply to HMRC to be a distiller and warehousekeeper but you don’t want to spend money to acquire premises or convert property or buy equipment unless HMRC is prepared to licence and approve your application but you don’t know that they will. Bit of a conundrum.

Until a few years ago, HMRC’s Notices 39 (Spirits Production) and 196 (concerning excise warehouse approval) required that applicants for distilleries and warehouses must apply to have plant, process and premises approved by HMRC before commencement of any operations whilst stating in the same breath that no premises should be leased or bought before making such an application. I called this the “chicken and egg” paradox.

The notices extant at that time stated: Notice 39

2.1 What general requirements must I meet? Before you start to produce spirits you must:

• obtain a distiller’s licence (see paragraph 2.2),and

• apply for approval of the plant and process you intend to use (see paragraph 2.4).

2.4 How do I apply for approval of plant and process? You should write to the National Registration Unit providing … details:

In your own interests you should not acquire land or premises or begin any building operations until we approve your plans.

Notice 196

4.4 Applying for excise warehouse approval

When you apply you must include:

• three copies of drawings or plans showing details of the proposed approved area

Prior to approving the premises an HMRC officer will visit you, at which point you must satisfy us of all of the following:

• the premises are physically secure and suitable for the intended purpose

• potential risks to the revenue are appropriately managed •our officers can work in a healthy and safe environment.

You should not assume that we will grant excise warehouse approval for your premises. Therefore, in your own interests you should not:

• acquire land or premises

• start structural work, or

• take any other action

• before you have obtained this approval.

To try to bring some sanity to the situation, I met senior HMRC Policy officials in 2015 who made a firm commitment to me to remove the paradoxical requirements in Notices 39 and 196 which I called the “chicken and egg” paradox; HMRC called it a Catch 22. The point is – and as HMRC commendably understood - a letter of indication should be available to any person needing a degree of certainty about how HMRC would view an alcohol approval licence/application, whether they are borrowing money or intending to commit their own funds.

The irrational policy in Notice 39 was amended and has simply been expunged from Notice 196. Notice 39 now states (ellipsis applied):

Before applying to HMRC ….

Identify production and warehouse premises. If you do not own these, you’ll need to provide evidence to show you are planning to purchase them with any application you make.

We can issue a letter of indication to help you in securing finance to complete your plans where we’re satisfied from the details in your application that you are likely to succeed. For more information, read paragraph 2.4.

You may need to apply for a letter of indication of likely approval to satisfy bank lending requirements, for example.

This ought to do the job, but the above wording appears to some HMRC officers to only to relate to a need for a letter of indication for the purposes of financing the endeavour rather than, say, self-fund it, although the notes in Notice 39 state: “You may need to apply for a letter of indication of likely approval to satisfy bank lending requirements, for example…”

On behalf of affected industry sectors, I have therefore requested that HMRC Policy re-considers the need and purpose of expressions of interest and consistency within the public notices to the effect that:

• letters of indication may be issued on application whether the premises (distillery or (any) excise warehouse) are actually owned or leased provided that the business “appears sound” (and would in all material particulars be that of the application made “in principle”);

• letters of indication may be requested regardless of whether the applicant requires financial assistance or is self-funded.

Expressions of interest from potential customers

Moving on, the further problem is that some HMRC officers appear to be requiring “letters of intention” or “expressions of interest” from applicants for approval as commitment from prospective customers to consider listing a product that does not exist and cannot legally exist unless and until a distiller’s licence and approval is issued by HMRC. Moreover, HMRC appears to be requiring that some samples of the product be made by a third party licensed distiller just to hawk around these prospective customers and even though the actual product may not be the same thing as the sample product (which would not be “authentic” anyway, thus confounding the entire point of the project).

Critique of HMRC requirements

There is no stipulation anywhere for “letters of intent” or “expressions of interest” to be submitted with any approval application, although it has become a standard “boxticking” exercise by HMRC.

The requirement for applicant distillers/warehousekeepers to provide “letters of intent” or “expressions of interest” goes to the very heart another irrational ”Catch 22” imposition. An applicant cannot, by law, produce spirits without a licence and approval. Similarly, an applicant rectifier/compounder cannot rectify or compound spirits without an appropriate licence. Yet HMRC requires a person with no product that they can legally produce to obtain confirmation from prospective customers that the non-existent product will be considered for listing by that prospective customer. It is utterly irrational.

To save time in most other cases, I have advised applicants to obtain three or four “expressions of interest” from customers to the effect that when the product becomes available, they will consider listing the product subject to its quality and availability etc. HMRC almost invariably accepts such “expressions of interest” even though they are not really worth the paper they are written on but it seems to satisfy HMRC’s box-ticking mind-set.

Alan Powell