When duty calls

It’s late January and I’m at John Street Police Station in Brighton. Before me is an Aladdin’s cave of smuggled, counterfeit and illegal goods: to be more accurate 2,270 litres of beer, 2,950 bottles of spirits and wine, 2,600 cigarettes and 50 kilos of Shisha tobacco. This is the haul seized by police, HMRC and Trading Standards officers in just two days of raids - which I took part in - on more than 40 premises suspected of being involved in illicit trade in the area.

There’s no evidence a penny of duty has been paid on any of it. You wouldn’t want to drink or smoke much of it either - the officers suspect the ‘Soviet Vodka’ has been produced in an illegal still and could contain lethal ingredients.

Yet countless innocent consumers do - because the industry for illicit booze and fags is going great guns. HMRC estimates that taxpayer losses through duty-avoided alcohol alone hit £1.2bn last year, up from £850m the previous year. Seizures have climbed 61% following the introduction of 12 regional HMRC taskforces in 2010 [National Audit Office]. The question is: are they making any difference?

On the day I joined the 15 HMRC officers, three Trading Standards personnel and three licensing policemen involved in the raids, I was taken aback by how oblivious to - even blasé about - their offences the proprietors of the c-stores, off-licences and cafés targeted were. One off-licence had a blackboard outside brazenly advertising itself as a cider bar even though it had no alcohol licence. Another was doing a roaring trade selling bongs, hookah pipes - and shisha tobacco. And one shop keeper freely showed officers his five cases of Soviet Vodka, before offering the defence that he wasn’t going to sell it. Such casual disregard for the law underscores how difficult it is for the authorities to clamp down on illicit trade - and these are just the small fry.

Customs failing?
Raids rarely help catch the criminal gangs behind it, which is where HMRC’s real failings lie, according to a report last month by the National Audit Office (NAO). The report concluded that HMRC has “had no tangible success” in working with the industry to stem the flow of smuggled booze into the country over the past year (The Grocer, ‘HMRC to ‘turn off taps’ on black market booze’, 4 February, p5). It noted that an anti-fraud IT system in development since the mid-1990s was still not functional and that there had been no increase in criminal cases brought against booze fraudsters.

It’s a charge that HMRC, for the most part, accepts. “Where the NAO says we have had limited success is at the core of the fraud,” admits director Andy Leggett. “We know this is a big problem and involves organised criminals. Logistically we know that this goes much further than white van men doing booze cruises. These are well established, complex and well thought through supply chains.”

Not that the most prevalent scam - ‘diversion fraud’ - is at all sophisticated. The crooks claim their stock, mostly British lager or New World wines, is exempt from UK duty payments because it is to be shipped to the Continent. They then divert it to the UK black market. A staggering 450 million litres of British beer are sent to France, Belgium and the Netherlands every year. Most of that makes it back here.

“There is significant revenue at stake. But more critical than that is the impact it has on legitimate businesses in the UK,”says Leggett. “There are 30,000 convenience stores and local shops that sell alcohol in Britain. Legitimate businesses are struggling to compete with rivals that are undercutting them by selling this alcohol.”

Which is where the raids come in. On the day I took part, officers - prompted by a mixture of tip-offs and Trading Standards inspections - have soon amassed a haul of five cases of vodka, several kilos of shisha tobacco and 200 cases of wine. Then jackpot: we find a man unloading cases of Italian wine from a van outside a Hove off-licence. A further 200 cases of wine, 70 slabs of Polish beer and several cases of Glen’s Vodka are found inside. The Turkish driver from London says he’d bought it off the back of a lorry in Barking that morning. The deal was cash only. There’s no paperwork.

An important warning
Taking illicit goods off the streets in this way may be no substitute for catching the criminals who sold the goods to the driver in the first place, but there is anecdotal evidence to suggest it revives the fortunes of law-abiding business owners. For a while, at least.

“The really interesting thing is that in the North East following HMRC enforcement activity last year, some of our members actually reported a rise in alcohol sales, but once the crackdown was over, sales fell dramatically again,” says David Visick, director of communications at the Federation of Wholesale Distributors.

It also sends out an important warning to retailers tempted to knowingly sell smuggled or counterfeit goods. “All of the shopkeepers will receive verbal warnings and have their stock seized until they can provide documentation to prove duty has been paid on it,” says a police officer as yet more alcohol is carried out of another Brighton off-licence. “That provides a financial deterrent and they now know they are on our radar and we will visit them again. We will seek to revoke the licences of repeat offenders.”

The authorities will have to keep up the pressure, though. Brighton has its fair share of repeat offenders. In fact the name of one wholesaler crops up repeatedly during the raids as the tally of contraband goods mounts up.

The good news is that the authorities could soon be handed greater legal powers to bring repeat offenders to justice. In the next few months, HMRC will brief ministers following an informal consultation with the industry. Proposed changes to the law include the application of fiscal stamps to beer to prove UK duty has been paid on them. The introduction of stamps to spirits in 2005 made the identification of duty-avoided drink far easier and with so much British beer disappearing into the black market every year, the case for applying them to beer is strong.

The downside is the cost the industry would incur as a result. One commentator calls it the ‘nuclear option’. Leggett concedes: “One of the factors we have to consider is the implications for the industry and the costs. They have to be proportionate. These are the right questions to be asking.”

Questions are also being asked after HMRC saw a 9% hike in businesses claiming back UK duty paid last year (claims were expected to fall 15%), leading many to conclude that criminals are using this as another way to sidestep the taxman. “This shows the resilience and cunning we face. Whatever you do, the fraudsters will try to find a way around it,” says Leggett.

The department is seeking legal advice on the application of VAT assessments to claim-backs to stamp out the practice. But progress won’t just depend on changes to the law. The NAO found that HMRC was unable to download data from the EU-wide Excise Movement Control System, an anti-fraud computer network that has been in development for more than 15 years, and recommended that the department “take urgent steps” to rectify this. HMRC is now developing the system’s anti-fraud capabilities, says Leggett.

The sooner systems like this are up and running, the better. The Turkish driver may have been sent off several thousand pounds worth of goods worse off, but he’ll be back - and he’s just the tip of the iceberg. “Hundreds of people do what he’s doing every day,” says a Customs officer. “Today he was unlucky. He couldn’t give any invoices or paperwork to prove that the goods in his van were legitimate. The details he gave were vague. He said that he bought the alcohol off the back off a lorry in Barking. Unfortunately it’s a familiar story.”

Until HMRC stems the flow of illicit alcohol coming into Britain it will remain so. And law-abiding businesses will continue to suffer.