Scotch Whisky

In 2022, global exports of Scotch whisky surpassed GBP6.2 billion for the first time, with an average of 53 bottles being exported per second, to 180 markets around the world. The industry is also experiencing an exponential rise in the value of “single casks” (one-off releases) and rare bottles of Scotch whisky. In November 2023, a bottle of Macallan 1926 single malt sold for a record-breaking GBP2.1 million, making it the most expensive bottle of wine or spirit ever sold at auction.

It is easy to understand the growing interest of companies and private individuals to enter into this market. Purchasing a cask presents an exciting opportunity to be part of the history of Scotch whisky and, potentially, an investment opportunity. However, it also presents a risk to the unwary. The sale of whisky casks is not regulated by the Financial Conduct Authority, and there have been reports in the media of sophisticated multi-million pound “whisky fraud” schemes. This is a risk to individuals, as well as the industry as a whole.

Before purchasing a cask of Scotch whisky, it is important to carry out full due diligence on the asset. It is also important to understand the way that the industry works in order to navigate the market and properly assess the risks and opportunities.

In this article, we outline some of the key considerations for prospective investors in casks of Scotch whisky. This article is intended as a brief overview of the regulatory environment in Scotland today and does not constitute investment advice.

In later articles, we will look at creating your own brand; proof of ownership; and security.

Provenance

Without doubt, the value of Scotch whisky lies in its provenance. It is an industry steeped in history and tradition, with the first documented distilling of Scotch Whisky recorded in 1494. Distillers work hard to ensure that standards are maintained and avoid over-production; thus ensuring the value (and legacy) of their brand. Provenance has always been, and remains, of critical importance. However, therein lies a curious paradox. Whilst some aspects of Scotch whisky production are tightly regulated, other aspects – relating to the sale and transfer of ownership – are not regulated and are directed by custom and practice in the industry.

Formal regulation of Scotch Whisky is contained in the Scotch Whisky Regulations 2009 (the Regulations). Amongst other requirements, the Regulations specify that for a spirit to be sold as Scotch whisky, it must have been produced (and matured) in Scotland; have matured for at least 3 years; and have only matured in an excise warehouse or other permitted place. This means a warehouse authorised by HM Revenue and Customs (HMRC) for the suspension of duty whilst the whisky matures prior to bottling. The Regulations also contain strict provisions on the use of geographical indicators of origin, naming, and movement of Scotch whisky.

Critically, however, there is no regulated market for the sale and purchase of casks. There is also no common register of casks or their owners, and casks are often not sold with a “logbook” containing historic records to verify its provenance. Whilst HMRC’s Excise Movement and Control System tracks the movement of casks between warehouses, the register is not publicly accessible. There are also restrictions on the information available to authorised persons within the industry due to confidentiality and data security.

Without regulation of the market, individual investors must complete due diligence to satisfy itself of the provenance of the cask. For example:

• What is in the cask? When purchasing on the market (rather than from the distillery), enquiries should be made and historic records obtained to verify the contents of the cask. The cask should also be re-gauging prior to purchase to confirm the volume and ABV of the spirit.
• Who is the owner of the cask? Evidence of the seller’s title to the cask must be obtained. Plainly, if the seller does not own the cask (and cannot demonstrate that it is acting on the authority of the owner), it cannot transfer ownership of the cask.
• Where has the cask been stored? The historic storage of the cask should be traced. As noted above, to be sold as Scotch whisky, the spirit must have been stored in a bonded warehouse at all times. If the cask has spent a period outwith a bonded warehouse, it cannot be sold as Scotch whisky.

Whilst elementary questions, these are all of critical importance when it comes to the value of the cask and investment opportunity. Investors can be protected through thorough due diligence and the terms of sale contracts.

Transfer of ownership

There is no prescribed process for the sale and transfer of ownership of casks of Scotch whisky. For example, there is no style of sale contract (or particular terms) that must be used, and no regulated process for the transfer of ownership (although, see below regarding the role of HMRC through the WOWGR Regulations).

In practice, purchasers of casks may be provided with a “certificate of ownership” by a seller. A certificate of ownership may be provided to demonstrate the seller’s title to the cask, or to show a purchaser that it is now the owner of the cask. However, such certificates carry no legal weight.

Under Scots law, a whisky cask is classified as “moveable property”. Until recently, under Scots law there required to be a physical transfer of moveable property to properly effect transfer of ownership. However, within the whisky industry, the accepted practice of issuing a “delivery order” has been utilised as an alternative to physically moving the cask (where the cask was to remain in the same warehouse post-sale) and to give effect to the transfer of ownership. In effect, a delivery order is a direction issued by the current owner, advising the warehouse keeper that ownership has been transferred to the purchaser and directing that the warehouse keeper amends its register to record the change of ownership. It is therefore essential that the delivery order is issued (promptly) to the warehouse keeper. It is also advisable for a purchaser to request written confirmation from the warehouse keeper that its register has been updated and that the purchaser is recorded as the current owner of the cask.

Investors must also consider who is to hold title to the cask following a purchase. The Warehouse keepers and Owners of Warehoused Goods Regulations 1999 (WOWGR Regulations) provide for the approval and registration of excise warehouses; owners of goods held in excise warehouses; and duty representatives of owners of goods held in excise warehouses. Assessment and approval is carried out by HMRC. As duty on whisky is suspended whilst a cask is maturing, HMRC assess and approve warehouse keepers and persons who are to be the owner of goods held in excise warehouses. It is for that reason that overseas owners of casks of whisky (who could not easily be pursued for unpaid excise duty) must appoint a local “duty representative” in Scotland to act as their agent in respect of the cask.

Prospective UK-based investors must therefore consider the application of the WOWGR Regulations and the requirement to obtain a WOWGR licence. Overseas investors must identify a duty representative who will act as their agent.

On 29 November 2023, HMRC concluded a public consultation on possible reform of the WOWGR Regulations. The possible outcomes of this consultation range from outright abolition to retaining the status quo. HMRC’s response and proposals from the consultation are eagerly awaited from all in the industry.

Brand, labelling and bottling

The Regulations impose restrictions and requirements on the labelling of bottles of Scotch whisky. For example, what information must be stated on the label; the use of distillery names; and treatment of region geographical indicators. When designing a label and marketing Scotch whisky, it is critical that the Regulations are followed. The Scotch Whisky Association has produced helpful guidance, and also offers a service to review (but not approve) proposed labels.

Prior to investing in a cask, enquiries should be made to confirm whether the cask is sold without any limitations imposed by the distillery on the naming rights. The value of bottled whisky can increase significantly if you are able to refer to the original distiller’s name when selling the bottled whisky. However, there can be terms imposed by distillers that could restrict or prevent such use.

Consideration should also be given to where and when the cask is to be bottled. Casks should be re-gauged to check the volume and ABV. On average, 2% of the volume of a cask is lost each year (the angel’s share) and the ABV also decreases. To be sold as Scotch whisky, the ABV must be 40% or higher. Enquiries should be made to identify a bottler who will agree to bottle the cask. This can be more challenging if only bottling a single cask, and so the timing for bottling should be kept under review.

It must also be remembered that Scotch whisky cannot be exported in casks – it must be bottled first or exported in a container. Further, Single Malt Scotch Whisky can only be exported from Scotland in bottles that are ready for retail sale, and cannot be re-bottled outside Scotland.

Further detail in respect of labelling, branding and bottling (including creating your own brand or becoming an independent bottler) will be considered in greater detail in a subsequent article in this series.

Comment

Scotch whisky is currently seen by many investors from across the globe as presenting an exciting, and potentially lucrative, opportunity for investment. However, certain aspects of the industry are highly regulated and care should be taken to ensure provenance and ownership, and compliance with the regulatory requirements.

Whether you are a new entrant into the market or wish to expand your interest or establish a new brand, our team of regulatory experts at DLA Piper based in our Scottish office in Edinburgh can help you to navigate the industry. We have experience of advising on the regulatory requirements, as well as industry custom and practice, and can provide advice to assist you.

DLA Piper and our Scotch whisky team has experience of advising clients across the globe in the distilled spirit sector and would be pleased to discuss any issues which arise from the terms of this brief guide.