Smoking Out Illicit Tobacco Trading

Sanctions to tackle tobacco duty evasion and other excise duty evasion Consultation document Publication date: 17 February 2017 Closing date for comments: 12 May 2017

It might become compulsory for commercial, and possibly residential, landlords to actively inspect their properties and police tenants suspected of tobacco and other excise duty evasion under plans proposed by HM Revenue and Customs.

HMRC is of the view that, despite improvements, tobacco fraud remains a problem in the UK with an estimation of 5 billion illicit cigarettes and 3,200 tonnes of illicit hand-rolling tobacco being consumed in the UK in 2015-16. This challenges legitimate tobacco business, public health and facilitates the supply of tobacco to young people. To address this issue, legislation was introduced in January 2017 for a raw tobacco approval scheme but tougher sanctions are now being considered to tackle the problem head-on.

How could this affect landlords?

Retail outlets are often used to sell illicit tobacco and in some cases, it is thought that some landlords are aware but decide to turn a blind eye for the sake of rental payment. Furthermore, in some cases, it is believed that the landlord is actively involved. Landlords are now going to be a part of preventing illicit tobacco trading from happening under their roofs.

What will landlords have to do?

The consultation offers two main approaches: a voluntary approach or the introduction of a new statutory duty of care.

The first approach comprises of the introduction of an additional clause which expressly makes any sale of illicit tobacco trading or any other illicit activity tantamount to a breach thus terminating the existing lease. Tenants should be evicted if such breaches occur. This will not only act as a deterrent to tenants but will also aid in the landlord’s defence to show that reasonable steps were taken, particularly if a copy of the lease (with the express clause) is sent to the HMRC as proof.

The new duty of care would be enforceable by a civil penalty for landlords who fail to take reasonable steps to ensure that their property is not used to evade duty. Imposing a duty of care on landlords will not only prevent landlords from actively being involved with illicit tobacco selling but also prohibit landlords from omitting to intervene when illicit tobacco is being sold in their properties.

Such duty of care will only arise once the landlord or landowner has been notified that the tenant has evaded tobacco duty (or other excise duty.) Landlords who have taken reasonable steps to prevent future wrongdoings on their property are offered defences which slightly reduces the burden on landlords.

Reasonable steps that could be used as a defence include undertaking periodic checks of the premises and for all landlords to request information relating to the tenants’ business or the additional provisions in the new lease making it clear that illicit tobacco trading or other excise acidity would terminate an existing lease. Consequently, if a landlord is made aware of the illicit activity, they must contact HMRC or Trading Standards immediately.

What about residential landlords?

The HMRC is not being clear about whether this will apply to residential landlords. The consultation does not make it clear whether it applies to commercial or domestic landlords. Additionally, we are aware that the HMRC has approached organisations representing residential landlords requesting their comments and so it seems they are intending that residential landlords should be caught by these changes.

On a practical basis, making private residential landlords carry out periodic checks could be very difficult to police as well as time-consuming and costly. Tenants have a right to quiet enjoyment of their home and residential landlords cannot simply expect on a whim and so their ability to detect unlawful tobacco sales is minimal.

Further, residential landlords are not, in fact, able to evict tenants for unlawful tobacco sales without solid evidence and, in all probability, a prosecution for the offence. If HMRC is stepping in to prosecute the tenant then it is likely that they will want to prosecute the landlord at the same time. This would mean that the landlord would not have had the opportunity to evict the tenant prior to the prosecution.

When will we see changes?

It is yet to be decided which approach will be taken. If a new statutory duty is introduced, the reasonableness of steps taken by the landlord and the proportionality of sanctions will need to made clear alongside which sanctions should be applied to landlords who fall short of their duties.

Some of the requirements seem very burdensome. Practically, it may be too difficult for landlords to regularly check on tenants, particularly for commercial investors who have large portfolios. This also raises questions surrounding subletting; would the landlord be expected to check the tenant and the subtenant? The introduction of the additional provision in the lease may be an easier option and perhaps and good place to start but if that is not a strong enough action then perhaps we will be seeing a new statutory duty backed by civil penalties quite soon.

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