Prophecies, Seized Casks, Bankrupcies,

1 Feb

01/02/2024
The internet has a long memory, in the sense that they say (whoever they might be) that data can always be found, even if you think you’ve deleted it. It certainly seems to work that way with politicians and their Tweets. I always assume that people know my stance regarding buying casks, because 2010, and my original website seems like yesterday. Buying casks of whisky should be for the purposes of selling the end product in bottles, or for fun with a group of friends. Investing in a product which has a shelf life and inevitably must be transferred into a bottle at some point is a risky business. It might leak out of the wooden cask overnight, leaving you with nothing. You shouldn’t do it if you can’t afford to lose it all. In the case of our company, we’re happy for you to visit, taste the cask in situ, or come to take part in the bottling. The fun parts that make some of the risk a little bit more worthwhile.

When we started buying and selling casks in October 2010 (back then it was “I”, really), there were lots of online clubs and forums, many of which have fallen by the wayside, with increased used of Facebook. These clubs could buy casks from Bruichladdich, Bladnoch, Arran and maybe a couple of others, but very few of them could simply approach one of the big manufacturers and ask to buy a cask. Even 10 or 15 casks is not worth the effort to the big guys.

So there was a gap in the market. We came along, happy to deal with small customers, quickly setting up our own small trade facility warehouse for bottling and export. 2011 was spent dealing with HMRC, movement guarantees,, transportation issues and food hygiene certification. At that time, we could purchase casks, take a modest profit, sell the casks on and then benefit a little bit from the additional work that came along with the casks, primarily in bottling.

Our company grew successfully from then, buying our current premises in 2014 and focussing on kitting it out with racks, increasing staff numbers, training and any number of Health & Safety improvements that come with having staff. The warehouses were filling nicely and we began to experience some of the issues that go along with cask storage, mainly due to changes of ownership within the warehouse.

One of the first problems (that I can remember clearly anyway) related to a sherry butt of Bowmore, filled around 1995, so fairly valuable at around 24 years old. It had arrived with us around 2017 and we had informed the owner that the cask appeared to have been leaking at some point in the past. The weight at the time implied that the cask maybe only contained 240 bulk litres when you might have expected 380-400 bulk litres. The paperwork of course, stated the original fill quantity in 1995, so was useless in terms of informing us when the leak occurred.

It might come as a surprise to some people, but it is very common within the industry for a warehouse to regauge a cask, tell the owner the new quantity, but not update their records for that cask. In the early days in 2011 I purchased some 37yo Strathmill and 43yo Tomintoul. Given their value, I paid for a regauged quantity of litres, listed on the invoice to me. The casks were delivered to my warehouse with the paperwork showing the fill quantities that were correct in the late 1960s and early 1970s. When HMRC came for their first 6-monthly check up of my warehouse, the officers asked why I had been reporting such high losses. This was because almost every cask that arrived in my warehouse, arrived with the paperwork showing the original fill quantities. As the bottler and end of the line, I was left reporting the losses that occurred in every warehouse before me.

Anyway, back to the Bowmore example – since the paperwork showed original figures, we weren’t surprised, but we didn’t know if the owner was aware of the actual quantity or not, so we covered ourselves by emailing the owner in 2017 with a gross weight and dipping for the cask and an estimate of what quantity that might be. Nothing further was done with the cask.

Imagine my surprise in 2019, two years later, when one of the girls in the office asked me to deal with a complaint from a customer, half accusing us of mistreating their cask, because they’d been informed to expect several hundred bottles more than they’d actually yielded when they bottled this cask. I looked into it, found that I personally had been the one to inform the owner in 2017 and consequently discovered that there had been 3 different owners of this cask since 2017, one of whom had decided to simply forget about the figures we’d informed them and sell the cask on the basis of original litres, leading the final owner being told to expect far more than they’d actually purchased.

In this case, the final owner bears some responsibility of course, for not checking their purchase before buying, but we were absolutely certain that one of the three owners had deliberately witheld critical information in order to inflate the value of their cask. We never found out which owner was responsible.

In an attempt to solve this, we began to insist that any time we were provided with a Delivery Order, the new purchaser had to sign a document stating that they were aware that they had the right to ask for the cask to be regauged, at a then cost of £25. It was pointed out that this cost might be less than the price of a single litre of alcohol in the cask that they were buying. Fear of missing out ruined this plan. We could never understand why buyers were prepared to risk so much for the sake of saving £25, but in the end it simply seemed that buyers were afraid that asking for the delay caused by a regauge would result in them missing out and the cask being sold to somebody else. Fear of missing out was more powerful than caution.

Something that was presumably already happening before this seemed to explode in the early months of 2020. This has been mentioned by other people elsewhere online but all of a sudden, investors seem to notice whisky. While trying to navigate office staff working from home, we faced a daily onslaught of requests for new customer accounts, with the impossible task of perfoming due diligence on all of them.

HMRC state that “Due diligence is the appropriate reasonable care a company takes when entering into business relations or contracts with other companies, and how it responds to trading risks identified.” They list the FITTED approach. F: Financial Health of the company you intend trading with, I: Identity of the business, T: Terms of Contract. T: Transport, E: existence or provenance of goods, and D: Deal.

F: doesn’t work for a newly formed business, nor does it tell you an awful lot. Many of our best customers work on fine margins with little spare cashflow. Many of the worst have excellent cash flow and plenty of money in the bank. I: Doesn’t work with a sole trader recently just entered into cask trading and pretending to be private. T: As a warehousekeeper, you don’t see the contracts between two of your account holders. Our own terms stipulate that if you don’t pay, we’ll hold onto your goods until you do, so our terms are perfectly suited to us. T is presumably geared up towards white spirits smuggling where goods come in and out of warehouses a few time. In our case, casks come from reputable warehouses. E: We know the goods exist – they’re usually already here before we set up the new account. D: The deal for a warehousekeeper involves about £16 per year, per cask. This offers very little scope to become suspicious of somebody.

So we resort to Google, word or mouth, relying on existing customers not to give us bad new customers. HMRC would have us saving a copy of your driving licence as some sort of proof of something, but I challenge anybody in the UK to know the difference between a fake Saudi Arabian (just an example!) driving licence and real one. What possible benefit is there for us to have that image saved? The system is crazy. In the end, all we can really do is a smal amount of Googling and send out a questionnaire that explains the rules and asks where the potential customer falls into the various categories.

This brings us to the actual point of this post.



Prophecies

For years, we have been concerned about the fact that HMRC regulations demand that Warehousekeepers are aware of who the owner is of every cask in their warehouse. Due Diligence must be carried out on each of them. As of 2024, we have 912 separate owners of around 28,000 casks. This Due Diligence must be carried out “as regularly as is necessary”, (which is another way of blaming you for not doing it more often whenever something changes without your knowledge). The onus should be on the owner to keep the warehouse up to date at all times, and in theory it is, but yet the warehousekeeper is still jointly and severally liable, should any issues arise. Talk about HMRC having their cake and eating it.

Anyway, in 2020 the sheer volume of new accounts we were being asked to open (at that stage we had no fee), meant that we had to employ a member of staff, full time, just attempting to carry out due diligence. It seemed that other warehouses were all experiencing the same thing, and a few phone calls around May 2020 established that everybody was battening down the hatches and saying “no more new accounts”. We duly followed suit, with the exception of new accounts for customer to whom we had sold the casks directly. Interestingly, this created the scenario where people were prepared to buy a single cask of new make spirit from us in order to move their stock to us from other warehouses.

A total moratorium on new customer accounts is not good and has knock on effects on existing private owners or small businesses who genuinely wish to sell their only cask now that they’ve retired. We were effectively limiting who they could sell to, restricting the potential sale value of somebody else’s product. Not Good. Even with 900+ customer accounts, it doesn’t sit well with us that we should be able to dictate who you sell to. Unfortunately the risks to our company from HMRC far outweigh any rewards from having an extra cask storage customer that you’ve sold your cask to.

The total moratorium on new customer accounts created its own problem. Customers were selling their casks, but simply not telling us. Some of them are no doubt selling their casks and telling the owners “don’t worry, we’ll keep things simple for you, we’ll pay all of your rent for you”, which sounds wonderful until you realise that if HMRC find out, your cask will be seized.

We have it explicitly in writing from HMRC that companies cannot “lend” their WOWGR approval to other companies or people, retaining ownership within the warehouse. Warehouses must be informed of changes of ownership in advance of any sale and must be given the opportunity to perform due diligence on every owner. If an ownership issue arises within a warehouse, the warehousekeeper has 72 hours to rectify it before notifying HMRC.

When an ownership issue does arise, the seller, the buyer and the warehousekeeper are jointly and severally liable for any Excise Duty on those goods. Which means any one of the 900+ owners can sell their cask without telling us, to somebody who is not permitted to own a cask, (or even to somebody who is permitted but the warehouse isn’t informed), and all 3 parties are jointly and severally liable for the Excise Duty.



Seized Casks

This brings us to June 2020, where we had a new account opened by a gentleman in southern England, who read and answered our questionnaire, defining what a Revenue Trader was in the eyes of HMRC, and declared that he was definitely a private individual and not a trader. The lines can sometimes be grey – private owners can sell their casks to realise the value of their asset, but questions are supposed to be asked if they wish to buy more. Nothing is firmly defined. Wealthy private owners can own several hundred casks, provided they don’t have a business plan. This owner purchased a few casks of new make spirit from us, and some casks from another party in our warehouse. We subsequently received instructions in October 2020 to transfer some of these casks to a person in Germany, who we were informed was a friend, followed by another a couple of weeks later. Should we have suspected something then? We did suspect, but we were assured that the person was not a Revenue Trader, including with conversations over the phone. In January 2021, we received another instruction to transfer some more casks into another owner’s name. This time, the new owner got in touch directly, and included an invoice with business headed paper, confirming that the private individual was definitely a Revenue Trader. The 72 hour clock was ticking.

I telephoned the man and told him that I had 72 hours to resolve the issue but was going to have to report it to HMRC (who can and have asked for copies of our records going back years in the past and for whom I was going to do this man who lied to me no favours). I suggested that I hoped he had already applied for a WOWGR certificate and that if he hadn’t, he had best apply online immediately that morning (it is a free application that requires no special legal skills). The suggestion, or at least understanding that I had when I finished that call was that no application had been made or would be made.

I sent the report and all of the facts to HMRC, who duly seized the casks. What might surprise people and should definitely concern people is that the casks which had already been transferred to new owners were also seized. This has happend to us in the past where a rum cask came to us from another warehouse in 2017 and was bottled in 2018. HMRC came looking for it due to an irregularlity in the previous warehouse and seized it, despite the irregularity occuring with the previous owner and in a different warehouse. The current owner, based in the USA, had to pay the UK Excise Duty to have the cask released so that it could shipped to America.



Bankruptcy

In the intevening period between seizure in 2021 and January 2024, the company claiming to be private has gone into liquidation owing a long list of creditors a lot of money. The liquidators appear to have laid claim to those casks which were not transferred (i.e. that were sold to owners who knew specific cask number and have an invoice, but who had not received a delivery order or confirmation of change of ownership within our warehouse). HMRC have contacted the owners of the casks that had already been transferred and told them that they can have their casks back if they pay the UK Duty and VAT, releasing them from the warehouse for home consumption.

The moral of the story here is that you should not be re-assured by anybody telling you that they will manage your casks and they’ve got it all in hand. If you’ve paid for a cask, make sure it is in your name in the warehouse. Preferably check in advance so that the warheouse is not forced to open an account for you (if they say no after you’ve purchased then your casks are seized so they may feel guilted into opening an account for you).

Contracts vary and I’m not entirely sure of the legality of the liquidators in this case holding onto the casks. The process is slow, and perhaps they’ll hand over casks that were explicitly listed in invoices eventually, whether the warehouse was informed or not. I’m equally not entirely sure of HMRC’s blanket statement that a Duty Point is created when there is an ownership regularity. It seems that they should be able to force an owner to sell if they are not an appropriate person to own Duty Suspended casks, but it is not clear why the Duty should become immediately payable.

A final caveat relates to other companies maintaining control over your cask. In theory, this is permitted, provided the warehouse has all of your details and has performed due diligence. They can still deal directly with a 3rd party management company. The reality is that I’m not sure why any warehouse would be willing to do this – still having to perform all of the work and due diligence, only for the 3rd party to take an additional service charge for doing very little, and certainly taking less risk. Problems will also arise in this sort of situation, as the industry remains very small and it will not take long for the cask owner to realise that they are paying the 3rd party management company £50 per year for rent when they could pay the warehouse £17 directly. If your cask springs a leak, I don’t want to waste time talking to somebody in an office somewhere in London, I want to email or telephone you directly and get an answer immediately. As a warehousekeeper, or from the point of view of the cask owner, I see no benefits to letting a 3rd party company manage your cask, assuming that they follow the regulations and have informed the warehouse about your existence as the owner of the cask.



Something that was presumably already happening seemed to explode in the early months of 2020. This has been mentioned by other people elsewhere online but all of a sudden, investor seem to notice whisky. While trying to navigate office staff working from home, we faced a daily onslaught of requests for new customer accounts, with the impossible task of perfoming due diligence on all of them.

HMRC state that “Due diligence is the appropriate reasonable care a company takes when entering into business relations or contracts with other companies, and how it responds to trading risks identified.” They list the FITTED approach. F: Financial Health of the company you intend trading with, I: Identity of the business, T: Terms of Contract. T: Transport, E: existence or provenance of goods, and D: Deal.

F: doesn’t work for a newly formed business, I: Doesn’t work with a sole trader recently just entered into cask trading and pretending to be private. T: As a warehousekeeper, you don’t see the contracts between two of your account holders. Our own terms stipulate that if you don’t pay, we’ll hold onto your goods until you do, so our terms are perfectly suited to us. T is presumably geared up towards white spirits smuggling where goods come in and out of warehouses a few time. In our case, casks come from reputable warehouses. E: We know the goods exist – they’re usually already here before we set up the new account. D: The deal for a warehousekeeper involves about £16 per year, per cask. This offers very little scope to become suspicious of somebody.

So we resort to Google, word or mouth, relying on existing customers not to give us bad new customers. HMRC would have us saving a copy of your driving licence as some sort of proof of something, but I challenge anybody in the UK to know the difference between a fake Saudi Arabian (just an example!) driving licence and real one. What possible benefit is there for us to have that image saved? The system is crazy. In the end, all we can really do is a smal amount of Googling and send out a questionnaire that explains the rules and asks where the potential customer falls into the various categories.

This brings us to the actual point of this post.

Prophecies
For years, we have been concerned about the fact that HMRC regulations demand that Warehousekeepers are aware of who the owner is of every cask in their warehouse. Due Diligence must be carried out on each of them. As of 2024, we have 912 separate owners of around 28,000 casks. This Due Diligence must be carried out “as regularly as is necessary”, (which is another way of blaming you for not doing it more often whenever something changes without your knowledge). The onus should be on the owner to keep the warehouse up to date at all times, and in theory it is, but yet the warehousekeeper is still jointly and severally liable, should any issues arise. Talk about HMRC having their cake and eating it.

Anyway, in 2020 the sheer volume of new accounts we were being asked to open (at that stage we had no fee), meant that we had to employ a member of staff, full time, just attempting to carry out due diligence. It seemed that other warehouses were all experiencing the same thing, and a few phone calls around May 2020 established that everybody was battening down the hatches and saying “no more new accounts”. We duly followed suit, with the exception of new accounts for customer to whom we had sold the casks directly. Interestingly, this created the scenario where people were prepared to buy a single cask of new make spirit from us in order to move their stock to us from other warehouses.

A total moratorium on new customer accounts is not good and has knock on effects on existing private owners or small businesses who genuinely wish to sell their only cask now that they’ve retired. We were effectively limiting who they could sell to, restricting the potential sale value of somebody else’s product. Not Good. Even with 900+ customer accounts, it doesn’t sit well with us that we should be able to dictate who you sell to. Unfortunately the risks to our company from HMRC far outweigh any rewards from having an extra cask storage customer that you’ve sold your cask to.

The total moratorium on new customer accounts created its own problem. Customers were selling their casks, but simply not telling us. Some of them are no doubt selling their casks and telling the owners “don’t worry, we’ll keep things simple for you, we’ll pay all of your rent for you”, which sounds wonderful until you realise that if HMRC find out, your cask will be seized.

We have it explicitly in writing from HMRC that companies cannot “lend” their WOWGR approval to other companies or people, retaining ownership within the warehouse. Warehouses must be informed of changes of ownership in advance of any sale and must be given the opportunity to perform due diligence on every owner. If an ownership issue arises within a warehouse, the warehousekeeper has 72 hours to rectify it before notifying HMRC.

When an ownership issue does arise, the seller, the buyer and the warehousekeeper are jointly and severally liable for any Excise Duty on those goods. Which means any one of the 900+ owners can sell their cask without telling us, to somebody who is not permitted to own a cask, (or even to somebody who is permitted but the warehouse isn’t informed), and all 3 parties are jointly and severally liable for the Excise Duty.

This brings us to June 2020, where we had a new account opened by a gentleman in southern England, who read and answered our questionnaire, defining what a Revenue Trader was in the eyes of HMRC, and declared that he was definitely a private individual and not a trader. The lines can sometimes be grey – private owners can sell their casks to realise the value of their asset, but questions are supposed to be asked if they wish to buy more. Nothing is firmly defined. Wealthy private owners can own several hundred casks, provided they don’t have a business plan. This owner purchased a few casks of new make spirit from us, and some casks from another party in our warehouse. We subsequently received instructions in October 2020 to transfer some of these casks to a person in Germany, who we were informed was a friend, followed by another a couple of weeks later. Should we have suspected something then? We did suspect, but we were assured that the person was not a Revenue Trader, including with conversations over the phone. In January 2021, we received another instruction to transfer some more casks into another owner’s name. This time, the new owner got in touch directly, and included an invoice with business headed paper, confirming that the private individual was definitely a Revenue Trader. The 72 hour clock was ticking.

I telephoned the man and told him that I had 72 hours to resolve the issue but was going to have to report it to HMRC (who can and have asked for copies of our records going back years in the past and for whom I was going to do this man who lied to me no favours). I suggested that I hoped he had already applied for a WOWGR certificate and that if he hadn’t, he had best apply online immediately that morning (it is a free application that requires no special legal skills). The suggestion, or at least understanding that I had when I finished that call was that no application had been made or would be made.

I sent the report and all of the facts to HMRC, who duly seized the casks. What might surprise people and should definitely concern people is that the casks which had already been transferred to new owners were also seized. This has happend to us in the past where a rum cask came to us from another warehouse in 2017 and was bottled in 2018. HMRC came looking for it due to an irregularlity in the previous warehouse and seized it, despite the irregularity occuring with the previous owner and in a different warehouse. The current owner, based in the USA, had to pay the UK Excise Duty to have the cask released so that it could shipped to America.

In the intevening period between seizure in 2021 and January 2024, the company claiming to be private has gone into liquidation owing a long list of creditors a lot of money. The liquidators appear to have laid claim to those casks which were not transferred (i.e. that were sold to owners who knew specific cask number and have an invoice, but who had not received a delivery order or confirmation of change of ownership within our warehouse). HMRC have contacted the owners of the casks that had already been transferred and told them that they can have their casks back if they pay the UK Duty and VAT, releasing them from the warehouse for home consumption. Duty is currently £31.64 per litre of alcohol, so around £4000 for a 9-10 year old hogshead. VAT at 20% is £800. Another problem altogether is assessing the VAT due on the value of the cask. This should be based on the last invoice, or an accurate current assessment, but sometimes and owner might have lost their receipt (especially those predating word processing and email – imagine finding a receipt for your 1990 Macallan cask), and there is such variabilty in assessing value that it is fairly objectionable for HMRC to expect office staff in a warehouse to do this. One might say that your cask is worth £4000 and somebody next to them might say it’s worth £6000

The moral of the story here is that you should not be re-assured by anybody telling you that they will manage your casks and they’ve got it all in hand. If you’ve paid for a cask, make sure it is in your name in the warehouse. Preferably check in advance so that the warheouse is not forced to open an account for you (if they say no after you’ve purchased then your casks are seized so they may feel guilted into opening an account for you).

Contracts vary and I’m not entirely sure of the legality of the liquidators in this case holding onto the casks. The process is slow, and perhaps they’ll hand over casks that were explicitly listed in invoices eventually, whether the warehouse was informed or not. I’m equally not entirely sure of HMRC’s blanket statement that a Duty Point is created when there is an ownership regularity. It seems that they should be able to force an owner to sell if they are not an appropriate person to own Duty Suspended casks, but it is not clear why the Duty should become immediately payable.

A final caveat relates to other companies maintaining control over your cask. In theory, this is permitted, provided the warehouse has all of your details and has performed due diligence. They can still deal directly with a 3rd party management company. The reality is that I’m not sure why any warehouse would be willing to do this – still having to perform all of the work and due diligence, only for the 3rd party to take an additional service charge for doing very little, and certainly taking less risk. Problems will also arise in this sort of situation, as the industry remains very small and it will not take long for the cask owner to realise that they are paying the 3rd party management company £50 per year for rent when they could pay the warehouse £17 directly. If your cask springs a leak, I don’t want to waste time talking to somebody in an office somewhere in London, I want to email or telephone you directly and get an answer immediately. As a warehousekeeper, or from the point of view of the cask owner, I see no benefits to letting a 3rd party company manage your cask, assuming that they follow the regulations and have informed the warehouse about your existence as the owner of the cask.

Long, I know, but hopefully if a few people read this, it might mean I have fewer people to explain to!


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