If you manufacture, produce or arrange manufacturing or production of cigarettes or hand-rolling tobacco then you are wholly or partly responsible for the initial supply of cigarettes or hand-rolling tobacco after manufacture, and supply of cigarettes or hand-rolling tobacco to any person carrying on business in, or in relation to, a country other than the UK.
The applicable is found at:
Customs and Excise Management Act 1979
Tobacco Products Duty Act 1979 (as amended by the Finance Act 2006)
Tobacco Products Regulations 2001(as amended by the Tobacco Products (Amendment) Regulations 2006)
Tobacco Products (Description of Products) Order 2003
Duty not to facilitate smuggling
Section 7A of the Tobacco Products Duty Act 1979 places a number of obligations on you relating to the supply of tobacco products. You must, as far as reasonably practicable:
avoid supplying tobacco products to persons who are likely to smuggle them into the UK
avoid supplying tobacco products where the nature or circumstances of the supply make it likely that they’ll be re-supplied to persons who are likely to smuggle them into the UK
avoid otherwise facilitating smuggling of tobacco products into the UK
In particular you must:
in supplying tobacco products to persons carrying on business in, or in relation to a country other than the UK, consider whether the size or nature of the supply suggests that the products may be required for smuggling into the UK
have a written policy setting out the measures in place to comply with your legal obligations
If you’ve a reasonable excuse for breaching your statutory duty, you will not be penalised.
Having a written policy
You’re required by law to have a written supply chain policy setting out the measures in place to comply with the legal duty to avoid facilitating smuggling.
The policy needs to be regularly maintained to make sure it’s accurate and relevant and remains flexible and responsive to any developments in smuggling risks. It must be available to HMRC upon request.
A supply chain
A supply chain is a series of transactions. For example:
Manufacturer A produces cigarettes and sells them to Wholesaler B, who then sells the cigarettes to Retailer C. Retailer C then sells the cigarettes to the end user, Customer D.
Content of your written policy
There’s no list that sets out exactly what your policy must contain. HMRC's position is simply that you know your customers and markets best and it’s your responsibility to make sure that you take all reasonable action not to facilitate smuggling.
However, they do provide some examples of the measures and controls that they would expect to see when assessing whether reasonable actions have been taken. These can beused as a guide to help you develop your policy.
Management and Governance
This means having a clearly defined governance structure with established roles and responsibilities to make sure obligations are met. This could be via a governance committee, made up of senior executives, with the ability to assess the levels of risks in respect of regions, brands or retailers.
Culture and training
Embedding your policy and processes as a way of working both within the organisation and along your supply chain. Staff would benefit from bespoke supply chain training, particularly those involved in high risk areas. HMRC also recommends that you consider regular contact between staff responsible for supply chain controls and retailers or wholesalers within high risk markets to help reinforce the importance that you place on the issue.
Identifying risk
Establishing strong processes to identify and respond to risks within your supply chains, for example:
Customers: A strong Know Your Customer (KYC) process that gathers and analyses information. This will establish if customers are genuine and remain engaged in legitimate business activities during the period of their supply. Checks may include (but not be limited to):
credit status
company directors, and their other business interests
affiliates
volume or nature of tobacco products requested or supplied
method of payment requested, regular cash payments
details supplied by an enforcement agency that they present a supply chain risk
The process should allow for a clear evaluation and decision on whether you believe a customer poses an enhanced risk to your supply chain controls. Individual customer records should provide evidence that regular checks are being made together with details of any extra risk based investigations.
Markets: When analysing the risk presented by certain markets there should be a clear and evidence based evaluation. Monitoring supplies including the overall mix and volume within individual markets will help make sure your supplies are consistent with your evaluation of legitimate demand. You may also want to consider:
brand price positioning
the international corruption index
the makeup of local marketplaces
the number and type of seizures both by HMRC and other agencies
Where HMRC have specified products or a market as high risk then yours sales plans ought to include extra scrutiny by senior managers within the company’s governance structure. Recording discussions and conclusions of this scrutiny will help show that thought has been given to your legal obligations. The same process could be applied when introducing specified brands into new markets.
Any evaluation should be reviewed and updated regularly, and include additional intelligence supplied by HMRC and other agencies. Processes can be assured by involving Internal Audit as a way to challenge and review. This could be fed back to senior management to take any necessary actions.
Response to seizures
Establishing a clear and documented process for the management of investigations into seizures and other highlighted risks. Such a process would benefit from a description of the timescales anticipated for those internal investigations.
In addition, appointing named individuals with overall responsibilities for:
coordinating the inspection of seized goods
identifying how seized goods fall into the hands of smugglers
identifying potential weak links in current supply chain procedures
This could extend to making clear recommendations based on findings for an internal governance committee or senior managers to consider. Such recommendations could be made available to HMRC to demonstrate a proactive approach.
Third Party Management
Introducing commercial contracts with supply chain clauses that allow for the suspension, termination or reduction of supplies will give you more influence over your supply chain. It also provides a better opportunity to meet the legal obligations placed on you by Section 7A of the Tobacco Products Duty Act 1979.
Suspension, termination or reduction of supplies
You may suspend supplies to retailers or wholesalers that have been involved in facilitating smuggling and decide to reinstate after a specific period. In this case you must make sure that you have a clear process to support that decision. This may include:
a written requirement from the retailer or wholesaler to abide by the terms of your business’s written policy
clear guidelines that each retailer or wholesaler must undertake to continue receiving supplies
assurance in writing from the retailer or wholesaler that any identified supply chain weaknesses have been resolved
clear guidelines regarding a monitoring process to make sure the retailer or wholesaler is keeping to the terms of your written policy.
Applying your written policy
Your written policy is more than just a document, it should form part of your daily business activities. Important roles and responsibilities should be given to staff who are accountable for their delivery. You must be able to show that all the necessary internal controls related to it are applied and effective to make sure adherence to your legal obligations.
For your policy to be effective, all staff, wherever located, need to know it exists, be confident in what they need to look out for and that they have the ability to report concerns. It also needs to be clear to all wholesalers and retailers what your written policy is, who the decision makers are within your organisation and their methods of escalation. Sharing your written policy with important parties helps to set expectations and clarify possible consequences for failures.
Your policy also needs to adapt to changes in the market, the level of existing risks, the emergence of new risks and the activities of smugglers. Policies that do not adapt cannot reasonably claim to be effective.
Written policy and checks HMRC may undertake
Regular contact with HMRC about the controls and procedures you have in place in line with your written policy will lead to a better understanding of the changing pattern of risk. The aim should be to avoid facilitating smuggling. One way to do this is to maximise your supply chain controls and apply effective deterrents against those retailing EU duty paid tobacco products, in quantities that are not consistent with the:
domestic consumption in that market
estimated legitimate demand of the travelling consumer
During these conversations HMRC will look to make sure that all the legal duties have been satisfied. They may also include details of general risk identified by HMRC and other agencies.
Failure to meet a legal obligation or to reasonably consider and respond to risk, may lead HMRC to have concerns about the level of your compliance. HMRC may undertake checks on the content of your written policy to make sure you’re meeting your legal obligations and that your supply chain and other controls are relevant to the size of your business. For example, where you’ve set up an internal governance committee HMRC may carry out checks on your risk assessment processes and how decisions were reached to assess whether you have taken all reasonable actions.
HMRC may also arrange a meeting with you to discuss your written policy in circumstances where HMRC believes there’s a serious problem concerning your policy to address products entering into the UK. This will help them establish the appropriate measures that have been considered and actions taken. This includes whether the continued supply to a particular market or customer can be justified and whether there needs to be a reassessment on the demand for those products in the intended market.
Hammad Baig can assist with challenging any duty assessments issued, or any penalty levied, by the HMRC.
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