"The department does not make best use of intelligence and technology to detect and prevent alcohol duty evasion, " the report says.
In the event, they have settled for banning sales of drink for less than the tax paid on it (alcohol duty, plus VAT, a consumption tax).
Alcohol duty fraud in the UK often involves exporting alcohol to the EU - untaxed - and then bringing it back into the UK with false paperwork.
George Osborne has been looking at securing the headlines this year by scrapping a much hated tax: the so-called "beer tax" - the automatic 2% increase above inflation in alcohol duty - which both the Sun and the Sunday People have campaigned to see the back of.
The Royal Navy has tightened its rules on alcohol consumption before duty.
Alcohol duties and air duty will be frozen - but tobacco tax will go up by two percentage points above inflation.
Deputy Mark Dorey said he believed it was time to review duty free tobacco and alcohol for travellers to and from the Bailiwick, maybe even removing duty free altogether.
"Last year alone approximately 450 million litres of alcohol was shipped to the EU duty unpaid from the UK", said Mr Leggett, who is deputy director of alcohol strategy and tax for the government department.
BBC: Calling time on alcohol smuggling and drinks duty fraud
The report also dismissed calls for duty rates on alcohol and tobacco to be cut to undermine the profit margins of smugglers.
Under government proposals the ban is on sales of alcohol below the rate of duty plus VAT, rather than including the cost of producing the drinks.
The inquest also heard the Royal Navy's rules on alcohol consumption at the time of the shootings stated that individuals were allowed no more than 10 units in the 24 hours before duty, with no alcohol to be consumed 10 hours before.
This method exploits EU rules which state duty does not have to be paid on alcohol when it is being transferred between registered producers or wholesalers - it is only paid when it enters the marketplace.
Workers failed to properly fill out a form swearing they were "fit for duty" (meaning: not under the influence of drugs or alcohol).
The Law Society of Scotland has noted that while the imposition of a minimum price of alcohol is a devolved matter within the legislative competence of the Scottish Parliament, compatibility with EU Duty Directives must be taken into account.
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