Landlord regrets not undertaking "KYC" on its Tenant

We are VAT specialists, and don’t do much if any, excise duty work, but I felt bound to comment on a recent case and consider how this could impact our clients/local community.

Tideswell Ltd owns industrial units. A new customer – “John”- wanted to rent some space for storing pallets. Tideswell didn’t have a vacant unit available, so it decided to enter into an informal arrangement whereby John would pay £600 +VAT a month to share a Unit also used by Tideswell. Once a separate Unit became free, Tideswell intended to enter into a formal lease. In the meantime, no ID checks were undertaken by Tideswell.

Tideswell regularly unloads goods for its customers, and signs for deliveries on their behalf. Tideswell unloaded several pallets for “John” and signed for their delivery.

HMRC subsequently raided the Unit and found “John’s” pallets contained 2 million cigarettes on which duty hadn’t been paid.

Being in possession of illicit cigarettes is a strict liability offence, even if they do not belong to you. This saves HMRC having to prove that the person with the goods (e.g. a lorry driver arriving at Dover with excisable goods in the trailer) was actively involved in smuggling them.

HMRC seized the cigarettes and issued Tideswell with a demand for £1 million in duty and penalties.

The point here is that although it is clear that someone other than Tideswell should have paid duty before the cigarettes arrived at Tideswell’s unit, HMRC is required to demand the duty against the earliest duty point they can establish on the evidence they have.

This means that Tideswell’s only valid challenge to the Assessment would be if Tideswell could identify where, when, how, and by whom, the Excise Duty should originally have been paid. As Tideswell pointed out, it is HMRC that has the investigative resources and evidence to do this, but the burden was on Tideswell.

Although the apparent unfairness of this clearly troubled the Tribunal, in reality, Tideswell hadn’t been able to provide anything useful to help HMRC identify an earlier duty point and pursue “the crooks.”

The Tribunal decided that Tideswell’s Directors had been naïve, rather than knowingly involved, so it could reduce the penalty slightly, but Tideswell was still liable for the duty (over £750,000, plus a 12% penalty).

Could this happen in Somerset/Dorset? It does look as though “John” chose Tideswell to stash his cigarettes on the basis Tideswell’s premises was in a rural location and the unsophisticated and naïve owner (the Tribunal’s description) didn’t spot the potential risk or see the need for detailed ID check.