SHOWCASING THE BRITISH SPIRIT

Approval of new distillers Part II – Chickens, Eggs and Rum Tale

I pick up where I left off from the Summer article (ref) and after several exhausting months dealing with HMRC. I wrote that if 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 until HMRC is prepared to licence and approve your application, you can apply instead to HMRC for an approval in principle (or what HMRC calls a “Letter of Indication”).

This means that if an application meets the criteria for approval and is, in principle, “sound”, HMRC will issue substantive approval when the distillery is kitted out to be formally approved and the premises inspected and secure. This prevents the “chicken and egg” scenario of HMRC advising applicants not to acquire land or premises before seeking approval but will not approve the application until the premises and plant are satisfactory for such approval.

I noted 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. In one case, an officer of HMRC requiring that some samples of the product (rum) 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).

On behalf of the applicant distiller (“X”), I pointed out that such a requirement was irrational and excessive but the officer maintained her position and rejected the application. On behalf of X, I requested a formal review of the decision, which was upheld by HMRC’s

Reviewing Officer. The decisions implied “third party” samples could be produced as part of the “business plan” which was ludicrous. Moreover, it was clear that the officers had either not understood, or had disregarded, X’s business plan, which was thorough and set out a correct description of the plant and process for spirits production (a legal requirement for distillery approval), which included the materials and process of production of various types of rum. This was, in effect, the legally described “recipe” yet HMRC’s officers stated the applicant had not provided a “recipe”.

On behalf of X, I immediately lodged a Notice of Appeal to the First Tier Tax Tribunal, which includes the Grounds of Appeal. Normally, I would just summarize the grounds but in this case I decided to set out the full case against HMRC’s wholly unreasonable decision, banking on legally-qualified persons within HMRC to recognize their case was utterly without merit. And lo! On the last day that HMRC had to submit their Statement of Case to the Tribunal, HMRC’s litigation team requested a stay of the appeal to try to reach a settlement. We agreed to this course but it was obvious the case had been sent back to the Policy and operational staff because the offer to settle indicated a letter of approval in principle would be granted but that there was still an expectation that some sort of spirits sample might be required to make the business case satisfactory to HMRC. This was unbelievable.

We wrote back to say such an offer must be rejected and pointed out if a prospective distiller wished to make whisky or whiskey, such a product could not be sold as whisky/whiskey without it being matured in excise warehouse for 3 years + 1 day. Each distillery production is unique and HMRC could not realistically expect the product of an existing distillery to be allowed to pass off or make claims for its own product to be anything like a distillery which could not offer spirits as whisky for 3 years minimum. In the unlikely event another whisky distiller were to set aside some of their matured stock as possibly being like the applicant distiller’s product might be 3 years’ hence, any prospective customer would find such a situation totally bizarre and lacking credibility. The reality is that new distillers often offer product that is yet to be made as “founder’s reserve” ie the customers buy without any taste or ability to taste as whisky for 3 years’ minimum maturation. This is akin to X’s situation (albeit the rum need not be matured for a specified period).

I referred HMRC to communication with Mr Jamie Baxter, doyen of the artisan spirits industry and master distiller and a member of the British Distillers Alliance. Mr Baxter said: “For a full distillery making rum from molasses or whisky from grain, then there are just too many variables in mashing, fermentation, distilling and maturation for a contract distiller to make an identical product to that intended.” One might otherwise buy a bottle of rum at the offie and take it around potential customers and say to them “My rum will be made something like this and might taste like this, so, how about it? Would you give me a written expression of interest in my product when I make it?”

Eventually, HMRC relented and offered a settlement that does not require any sample being hawked around and which has been accepted. This experience, carried out on a pro bono basis to protect the entire future industry from HMRC’s policies going wholly off the rails, has been exhausting and taken over 10 man days’ of my time when I have already been overloaded with work. I would like to think HMRC has learned something from this that will be of mutual benefit.

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.