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HM Customs & Revenue is facing a potential “avalanche” of claims for damages after a leading Swedish drinks maker launched a High Court claim accusing the UK government of unlawful tax discrimination.
The claim by Kopparberg, which until recently imported all its flavoured ciders from its brewery in Sweden, alleges the government knowingly provided a tax loophole to UK-based drinks manufacturers that unfairly reduced the company’s profits.
The tax loophole, known as post duty point dilution (PDPD), allowed UK-based makers of flavoured wines and ciders to pay duty on high-strength imported wine concentrates and then dilute them in UK factories, avoiding significant amounts of duty paid on imports of finished products.
In papers lodged at the High Court, Kopparberg argued the practice of PDPD had handed an “unfair and unlawful advantage” to UK-based producers because the loophole breached EU state aid rules that required all companies to be treated equally.
Industry experts said that if Kopparberg won its case against HMRC it could lead to multimillion-pound claims from other importers of alcohol in finished product form, including leading supermarket chains, to seek damages for unfair tax treatment.
“If Kopparberg win then HMRC is open to an avalanche of claims from all importers of EU alcohol products that are similar to any of the products diluted by UK producers, which include table wines, fortified wines, flavoured cider and alcopops,” said Alan Powell, co-ordinator of the trade group British Distillers Alliance (BDA).
The practice of PDPD was banned for beer in 1993 and for pure cider in 2001 but was allowed by HMRC to continue for mixed products such as flavoured ciders and alcopops, which are legally designated “made-wines” for tax purposes.
The loophole was finally ended by HMRC in April 2020 following an intervention by the European Commission in 2017 warning that the practice infringed EU state aid rules.
In its claim, seen by the Financial Times, Kopparberg said the UK’s failure to close the loophole for made-wines, despite banning it for beer and cider and holding reviews of the practice in 2006 and 2011, was an “obvious and inexcusable” breach of EU law.
Lawyers for HMRC, outlining the government’s defence, argued that the practice of PDPD was not discriminatory to EU companies such as Kopparberg because there was nothing to stop them setting up in the UK and availing themselves of the same strategy.
“The claim that PDPD conferred an economic or selective advantage on domestic producers . . . depends on the claim that the Claimants and other importers could not readily have used PDPD,” the government’s lawyers wrote.
The government added that Kopparberg’s claim also relied not on proving that it had been unfairly charged duty in breach of an EU directive, but that its competitors had been charged too little duty, making damages highly difficult to quantify.
However, Powell of the BDA said a review carried out by a major UK supermarket chain some years ago had estimated that it could be owed as much as £400m over a four-year period in duty paid on imported EU products.
He added that industry players large and small were watching the outcome of the Kopparberg case very closely to see if they could benefit from a claim. “Even a small importer could benefit very significantly,” he added.
Kopparberg said that between September 2014 and April 2020 it paid a total £206m in duty to HMRC on pre-mixed products imported into the UK.
The company is suing for damage, plus interest and court costs, on the difference between its profits over that period and “the profits that they would have earned but for the market impact caused by HMRC’s breaches”.
The company said it could not quantify the scale of damages without further information being disclosed by HMRC, but asked the court to note “the gravity and extent of the breaches”.
Both Kopparberg and HMRC declined to comment.