Showcasing the British spirit

I wrote last about certain paradoxical requirements that HMRC has had to correct in terms of an applicant needing to obtain premises and equipment before approval will be given by HMRC but at the same time the applicant is advised not to acquire anything before approval is given. In a similar vein, in certain cases, HMRC is telling applicant distillers to have “recipes” and samples made up in support of the application despite the law not permitting any spirits production (eg to make sample batches) until that person is licensed.

The law states that nobody can produce spirits from a fermented liquor unless they hold a distiller’s licence. Furthermore, (licensed) distillers cannot produce spirits until they have applied for (and been given) approval of plant and process. This is required by Regulation 4 of the Spirits Regulations 1991, put into effect by section 2.6 of Excise Notice 39 – “Spirits Production”. By a letter or other submission with the licence application, the applicant must set out the details of the plant and process to be approved by HMRC. The process is a detailed description of the materials to be used (“ingredients) and method of production. This is then the “approved” process inserted into HMRC’s approval letter for the distiller. It is, in effect, the legally approved “recipe” but HMRC has no specific powers to ask for a “recipe” in isolation, as it were. It is part of the legal process of approval of the process.

HMRC has, in a recent case, required that a third party distiller produce the “samples” on behalf of the applicant distiller to offer to prospective customers and provide details of the “recipe”. This is wrong because it is not a “normal” requirement to have samples made up by a third party and confounds the purpose of an artisan distiller’s USP. Besides, the “recipe” is provided within the production process of the approval application, which seems lost on HMRC.

In any event, HMRC’s Notice 39 recognizes that an application from a small-scale distiller may be entertained provided that a business plan is submitted and acceptable to the Commissioners. Crucially, HMRC’s interpretation of the law is that the full panoply of licenses and approvals are always to be sought and issued before any spirits may be produced. In particular, Notice 39 states: 6.10 Producing spirits for experimental purposes.

There’s no exemption from the requirements covering spirits production for anyone seeking to manufacture spirits for experimental purposes (for example, to use in the making of a flavoured gin before deciding whether to sell the product).

All spirits producers must have a distiller’s licence, approval of plant and process, warehousekeeper authorisation and warehouse approval as per the information earlier in this notice.

As a choice, producers may wish to consider using duty-paid plain spirit and adding flavourings separately. In order to do this, a rectifier’s or compounder’s licence will be necessary, depending on the method of manufacture used (read paragraph 14 for more information about rectifying and compounding). (Emphases added).

Clearly, the initial production of spirits will necessitate the pilot distillation before scaling-up. All the spirits must be warehoused and, if subject to tasting (including trade samples), duty must be paid. It is also evident that HMRC will accept applications from small producers for a distiller’s licence/approval and excise warehouse approval from persons intending to make a product before deciding it is suitable for commercial sale (which would, perforce, require the scaling-up of the process).

The Commissioners suggest (“as a choice”) that producers “may wish” to consider using duty-paid spirits for further rectifying and compounding (requiring licences). Accordingly, there is no direction that any tests be carried out or samples prepared before the Commissioners may issue a distiller’s licence. In fact, and for clarity in law, what the Commissioners suggest in the above paragraph of Notice 39 is not an operation of spirits production but the rectification or compounding of dutypaid plain spirits that have already been produced (distilled). The Commissioners, not for the first time, appear confused. But what is clear is that there can be no prospect of production of spirits on any basis without the appropriate distiller’s licence, which the Commissioners implicitly accept may be conducted by a new small-scale applicant.

Crucially, the Commissioners state that

(a) distillation of spirits requires a distiller’s licence and associated distillery and warehouse approvals

(b) this applies to any size and scale (including experimental/developmental distillation);

(c) there is no obligation whatsoever for any third-party production of trade samples to be made up in support of the application for a distiller’s licence (although the Commissioners suggest that a producer may “consider” the making up of duty-paid samples); and

(d) any suggestion made by HMRC for duty-paid “experimental” trials can only apply to spirits already produced for flavouring, not initial distillation from a fermented liquor.

There is no legal option but to produce the spirits with a distiller’s licence. It would be illegal to produce spirits without a licence but the Commissioners will entertain any size of application subject only to the applicant being fit and proper and with an accompanying credible business plan. There is no basis to compel an applicant distiller to have trade samples distilled by a third party.

I wonder often if some of HMRC’s officers actually understand any of “the rules”.

Alan Powell