Revenue & Customs is preparing to brief ministers on a raft of new measures to crack down on duty fraud, according to a top HMRC boss who admits his department has failed to stem the flow of illicit alcohol to crooks defrauding taxpayers of an estimated £1.2bn a year.

In a candid interview with The Grocer in the wake of a National Audit Office report that found HMRC has had “no tangible success” working with the industry to combat duty fraud, HMRC director Andy Leggett said the measures would include introducing duty stamps to beer and applying VAT assessments to duty repayment claims.

“We need to work with the industry to turn the taps off illicit supply chains. This has been more difficult than we had hoped,” he admitted. “There are legal constraints. Competition law is the main one. Brewers can’t decide not to provide customers without specific evidence of fraud.”

The report concluded there had been no progress in stamping out ‘diversion fraud’ - the practice of exporting alcohol to Europe and smuggling it back to Britain to avoid paying duty. It said new measures were needed to cut fraud and called on HMRC to take ‘urgent steps’ to implement an IT system to allow it to target smugglers.

“Diversion fraud is where the big money is,” said Leggett. Every year an estimated 450 million litres of British beer is shipped to France, Belgium and Holland. HMRC believes as little as 50 million litres is actually sold there, the rest being smuggled back to the British black market.

HMRC will brief ministers before the April announcement of the budget, after an informal consultation with the industry. The department is consulting its lawyers about the application of VAT assessments to repayments of UK duty. It is also weighing up the introduction of duty stamps to beer, described as the ‘nuclear option’ by one tax expert because of its expense. Formal consultation could start as early as autumn.

It is also improving the fraud detection capabilities of a new EU-wide system that tracks shipments in real time - although no date has been set for the improvements to be implemented.

However, HMRC has had more success tackling duty fraud on the street last year using civil sanctions. It raised £476m by preventing fraud and collecting duty on seized goods, beating its target of £390m. Alcohol seizures climbed 61%. There was no increase in criminal sanctions.

The Grocer tags along on a successful raid

As HMRC answered criticisms about its failure to clamp down on duty fraud, it notched up a victory against illicit alcohol trade in East Sussex.

The Grocer joined Customs, police and trading standards on Tuesday for raids on more than 40 retailers across Brighton, discovering a delivery of suspected illicit drink in progress.

The encounter led to the seizure of thousands of pounds in suspected smuggled beer and wine, as well as counterfeit vodka, from a van parked outside an off-licence in Hove, East Sussex. Police believe the driver of the van was supplying several shops in the Brighton area.

“He was very unlucky,” said one HMRC officer at the scene. “Hundreds of people do what he’s doing every day.”

Several cases of Glen’s Vodka were taken from the suspect’s hire van on suspicion that they bore counterfeit labels fraudulently claiming duty had been paid on the drink. See next week’s issue of The Grocer for the full story of the raids.

Beth Phillips