The scheme clearly provides significant cash flow to the retailer and, by taking the duty out of the commercial supply, it also eliminates potential excise duty bad debts to the supplier in the event of default of payment of duty-inclusive invoices (because, unlike VAT, there is no bad debt relief for excise duty) and therefore should help 'both ends' of the supply chain regarding better credit availability. So what's the catch?
Well, unlike all other indirect taxes, the default position for deferring excise duty is a mandatory guarantee being required of twice the amount deferred in the period. This requirement, which applies to duty on alcohol, tobacco and oil, is totally unreasonable and commercially restrictive, so, in 2004, I formally challenged HMRC about the legality of the guarantee requirement as a standard condition of excise duty deferment. I won't go into the legal details about the challenge, but one simple and obvious point is that VAT is about 20% of the tax on oil at pump and excise duty 40%. The retailer has to provide no guarantee for the VAT they collect and pay five weeks later to HMRC (using the on-line payment system). So why should the same business have to provide a guarantee of any sort for the excise duty to be deferred for four weeks only, never mind a guarantee of double the deferred tax?
HMRC and the Treasury were eventually forced to agree to implement a system to provide for excise duty deferment with nil security. This became known as the Excise Payment Security System (EPSS), which was brought into effect in February 2007 and was introduced within the Chancellor's pre-Budget Report as being a "radical" trade facilitation measure "thereby reducing costs for compliant businesses in the alcohol, oils and tobacco sectors, and freeing up capital for investment." Furthermore, the scheme was intended to be most beneficial to SMEs.
As for any excise business, the EPSS 'nil security' deferment scheme has been open to fuel retailers from the outset, but HMRC has not actively publicised EPSS and, indeed doesn't make things easy. In fact, soon after the scheme was implemented I had to go to Court to win a case for an oil business which was unlawfully denied EPSS approval. Furthermore, the judge in the case said that "it should be clear from my decision that HMRC's guidance (for the EPSS scheme) is not satisfactory." The judge also observed that HMRC's guidance is so bad, he would have considered awarding our costs even if we had lost! Unfortunately, HMRC's guidance is still wretched and the process can be painful if you don't know how to tell HMRC what they should do! Fortunately, I have helped retailers to get EPSS approval from HMRC, but it should not be so hard to do unassisted.
There is another catch. The EPSS scheme only works for oil that can be supplied from duty-suspended terminals, which will usually be refineries or coastal (import) terminals. This is because HMRC has a policy that oil must be duty-paid if it is moved from the refinery or import warehouse, so inland installations can only receive and hold duty-paid stock (on which the duty has already been deferred higher up the chain). Can anything be done about opening up this restriction? Well, yes.
Contrary to industry belief, the restriction on duty-suspended movement of oil is not strictly law, but an HMRC policy, finding its expression only as a sentence or two in Customs' Notice 179. That is literally the full extent of the policy and it has certainly never been scrutinized by Parliament, who would soon find that such a restriction on the supply chain is unreasonable in terms of UK public law. Furthermore, and as I have had confirmed by senior counsel, where refiners are denied the ability to move product from their tax warehouse (such as PetroIneos in Grangemouth) to an existing tax warehouse in southern England, for example, this is in clear breach of the EU central excise directive. Furthermore, it seems to me that businesses should look to claim direct access to such EU-conferred rights to start moving product if they wish. So, legally, there should be no obstruction to the free movement of oil between UK tax warehouses under duty suspension and, accordingly, access by retailers to oil that can be duty deferred under EPSS. Until things are challenged, however, the entire UK oil downstream supply chain will remain strewn with breaches of EU and UK excise law. This in turn leads to procedural and accounting bodges allowed by HMRC to make things function, as well as the duty having a distorting effect on the market and damaging retailers (as confirmed by counsel). More of that next time.
epss is 'silver bullet' says pra
PRA calls for government support on duty deferment
The PRA has called on the government to support the duty deferment scheme which would facilitate a significant boost to petrol retailers' cashflow, thereby strengthening forecourt businesses, and ultimately improving the UK's fuel supply resilience.
Chairman Brian Madderson (pictured left) explained that a tanker load of petrol today costs the independent retailer more than £50,000, with Government tax (duty + VAT) being £30,000 and payable to the supplier virtually on delivery. There are no small or medium enterprises that have to pay so much tax before collecting the income from their customers.
"With such burdensome cash-flow constraints, it is essential that Government enables retailers to utilise the existing EPSS (Excise Payment and Security Scheme) for duty deferment relating to fuel supply," said Madderson.
EPSS was introduced by the Chancellor in February 2007 for alcohols, oils and tobaccos with the intention of freeing up capital for investment, thereby assisting Small & Medium Enterprises (SMEs). Today, HMRC allows an average of four weeks deferment of duty payment, but this is currently retained by the oil companies and importers that supply fuel to the petrol forecourts and is not reflected in the payment terms offered to independent owners. The PRA is now helping its members to gain duty deferment terms under this existing scheme.
"Regularising EPSS for forecourts would incentivise these hard-pressed retail businesses to hold higher fuel stocks and release funds/assets currently held as fuel payment security for investment purposes," explained Madderson.
"We are alerting Government to this 'silver bullet' that will both stimulate investment to provide more jobs and better facilities for motorists, especially in rural areas. We need the Government's full support, and support from the oil companies to make this happen quickly and effectively," stressed Madderson.
"With 6,000 fewer forecourts than at the time of the September 2000 fuel crisis, and all independents working to minimum stock levels, the UK's ability to weather supply disruptions has become dangerously eroded.
"Memories of the fuel stock-outs at petrol stations as recently as March 2012 remain vivid and analysts suggest that recent events at Grangemouth may just be the foretaste for dramatic industry changes ahead."