Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 260 - 279)



  260. But that is a problem in the country you are targeting rather than a problem at source?
  (Mr Gibb) Yes.

  Chairman: We will move on to the next question of excise duty.

Mr Welsh

  261. You will be pleased to know there is an All-Party Parliamentary Beer Club and in fact it is the largest all-party group in this Parliament!
  (Mr Gibb) I am wearing my tie!

  Chairman: We are not all members of it!

Mr Welsh

  262. I was a founder member so I should declare an interest—I do not know if it is a declarable interest but I will declare it anyway! With regard to excise duty, the tax situation is of great concern to the industry. The taxes on beer imposed by the UK Government are among the highest in Europe. The memorandum from Customs and Excise shows that only Finland and Ireland impose higher beer duties. Could you describe how high rates of excise duty affect the industry? Are there any particular impacts on its ability to compete against foreign companies?
  (Mr Hayward) Mr Chairman, may I first of all take the opportunity to thank you for your cordial welcome to me back to this place. As the other Englishman sat round this table, I am here to cover certain specific issues and allow my colleagues to comment in general on the Scottish matters. My mind did go back to the days when the Conservative Party had representatives both in Scotland and in Wales and I tried to speak in a Welsh Day Debate. As an MP for Bristol I was subjected to a far less cordial welcome than I received here this morning, so I am appreciative of that. Can I comment in relation to the overall question of duties which you have raised, Mr Welsh, and that is that you have had identified the stark contrast between the duties applicable in most of Western Europe and ourselves. It causes a number of problems, the most high profile one and the one on which I want to comment is the whole issue of bootlegging. We are losing as an industry—

  Chairman: Could I stop you there because Mr Swayne is going to be asking you about smuggling, so keep off smuggling just now.

Mr Swayne

  263. Let's get it all done in one.
  (Mr Hayward) I will keep the first answer brief. There is a stark contrast between the United Kingdom and most continental countries. The net result is a very high level of illegal importing. What we have seen over the years, and we have some very detailed statistics which we will happily provide for the Committee, is an ever greater involvement of criminality and criminal gangs. That applies north of the border, in Scotland, and south of the border. There is the supposition that the imports are concentrated in the South East. Well, they are, but we have very clear statistical evidence that large truckers haul into Glasgow and Edinburgh, haul into Dundee. In fact Glasgow is one of the few places where our statistics—which we share with Customs and Excise—increased between 1999 and 2000. So it is a substantial problem for the whole industry and is one that needs to be tackled, not solely because it is a problem for the industry but because it is becoming a growing problem for society.

Mr Welsh

  264. I am about to give you a free rein. If you could design a fair tax regime, what would it look like? If you cannot resist temptation, go ahead!
  (Mr Hayward) Perhaps I can start on that purely on the beer side. We have just made our submission to the Chancellor in relation to the forthcoming Budget and we have asked there be a small, 2p, decrease in relation to duty per pint. The reason it is specific, it is 2p, is that is duty and VAT, because obviously you have a multiplier on top of duty, and that means it can in some form be passed on to the consumer, because of course the minimum size of a sale is half a pint. We believe that will both benefit the industry overall and also reduce the element of bootlegging and criminality, so it is a two-sided coin.
  (Mr Stewart) We are not seeking harmonisation in terms of duty levels. That is unrealistic and is not really what is being looked for. We are looking to try and close the differential between mainland Europe and the UK so that discourages this. The other issue I would raise is that sometimes people forget, particularly in the beer business, which is predominantly on-trade, the amount of taxation which is collected over and above duty, because we are a highly labour intensive business. We are not the condensed spirits business, which takes a bottle of alcohol and distributes it in a very tight format, we have to deal with kegs of beer, we have to deal with the whole infrastructure associated with that. So the duty penalty for us, or the taxation penalty for us, should be seen as a whole. In Russell's case, he has £150,000 per employee in terms of total contributions, which is very high indeed.
  (Mr Hayward) In the United Kingdom the net take is £2.8 billion currently for beer in duty alone. For spirits it is in total £1.8 billion, and for whisky it is actually only £600 million.
  (Mr Sharp) You asked about the ideal world, and I do not think we are unrealistic enough to say we want zero duty, because we are responsible enough to know duties are necessary, but maybe at a slightly lower level. One of the problems we have is that since 1993 when the system of how duty was calculated and collected changed, it has become more and more complex via Customs and Excise. Currently at our brewery we employ two people full-time actually just to do duty calculations. We also have a brewery manager, a packaging manager, and a laboratory guy who spends a third of his time doing analyses to suit the beer duty calculations. The net effect of that is that it costs our little company £50 or £60,000 a year to collect the excise duty. I think the time has probably come—and I know we have all been talking to Customs and Excise about this—for a simplification of the system. I do not have any real problems in calculating what the VAT payments are every quarter, and there must be a similar system we could have based on that type of calculation which would make it easier for us as an industry and save money. If we could save some money, we could probably plough that money back into marketing or some other spend.

  265. The whisky industry claim that the high UK tax rates simply encourage other governments to raise duty in their own countries. Does this also apply to beer?
  (Mr Gibb) I do not think so. The levels of high duty are related to traditional and social issues.

  266. The memorandum from the Brewers' and Licensed Retailers' Association of Scotland stated that the pubs and hotel sector employs 127,000 people in Scotland. In addition, they may have a particular importance for rural communities, where the pub is often a prime source of local employment and the centre for the local community. Do you think Government policy pays sufficient attention to the effects which excise duties have on the Scottish economy, including local effects, or does it ignore these because of the revenue it raises from spirits?
  (Mr Gibb) All the studies we have done—and Rob can, I suspect, add more on this—which are taken in a UK context show that the pressures from duty and smuggling impact most severely on the rural pub. It is the most sensitive to beer volume, it is the one where the impact of alternative sources of beer like from the back of somebody's van is most intense. Certainly submissions we have made have looked at that very specifically. The answer is, in Scotland, where the dispersion of the rural pub is even greater than other places, that is a real issue. These are in many cases marginal businesses, hampered by the impact of the duty burden and, as we keep referring to, the regulatory burden. So in both areas Government policy is threatening that community.
  (Mr Stewart) If you look at the environmental levy—and I was trying to dig out the statistics and we will provide them to you[6]—because of the part-time nature of employment in pubs, you are going to see a further burden on the retail outlet during the coming 12 months. To an extent, it comes back to this issue that people are seeing the tax burden in one pocket and not seeing it across-the-board in terms of the pressure on rural pubs. We have highlighted this on a number of occasions and I think Scotland will suffer immeasurably from that.

  (Mr Hayward) I think, Mr Welsh, you made the point it was not just pubs, we are talking here about hotels and restaurants too, but there are many which are marginal operations. The more you make available other sources of product which are substantially cheaper, and do not give those outlets the opportunity to reduce their costs or keep their costs static, the less viable they become. That obviously applies in rural Scotland.

  Chairman: This is the appropriate point to move on to smuggling.

Mr Swayne

  267. I think we have actually covered most of the agenda but I have essentially three questions. Mr Hayward, you said you had statistics which I understand quantify the illegal trade?
  (Mr Hayward) Yes[7].

  268. Is it possible that the Committee could have those statistics? Also, could you give us some note on how you quantify that illegal trade given its nature, in other words, the intelligence and some idea about how reliable those statistics are? Secondly, do you have any idea of the extent to which that trade is dealing with a youth alcohol problem? Thirdly, moving on slightly, is the only effective action which you think can be taken by Government to reduce the incentive, reducing the level of duty, or are there other actions which the industry and the Government could be taking?
  (Mr Hayward) Perhaps I can take the last question of the only action with the question of quantity, and then I will come to the youth element. We started measuring in detail some nine years ago the quantity that was coming through, and we did careful research as to where the smuggled goods were coming through, and all the indications are that the research we did nine years ago remains relevant, ie it is overwhelmingly coming through the South East ports, ie Dover, Folkestone and the like. We started doing it—and the Labour members might appreciate this—because the industry was in substantial dispute with the then Exchequer because the Chancellor kept saying that it was not a problem and we set about proving it was a substantial problem. In the end Customs and Excise accepted that it was actually three times the scale of what the Treasury was then saying it was. It reached its peak about a year and a half, two years, ago, at about 1½ million pints a day. It started with beer and people have moved on to things like whisky and wine. We are now down to something above 1 million pints a day, and that indicates there are some actions which can be taken. There is no question that the Government has put in a lot of money in extra Customs and Excise officials and they are in the process of bringing in scanners. They are clearly concentrating primarily on tobacco and that is an element of frustration to us, but tobacco is so much more of a problem for the Treasury in terms of lost revenue, but it is having some effect. We think there may be diversion to other ports now, and we think there may be diversion to smaller vans—we have seen a move away from the white van man into Mondeo estates, Volvo estates, people movers and the like. We are clearly seeing, and I do not expect to see the drop go much lower, the involvement of criminal elements, and I will come back to that. It has got greater and greater. How do we come to these detailed figures? One, we do face-to-face enquiries—with the full knowledge of Customs and Excise, and we exchange all the information with them—twelve times a year, with people crossing both on the Shuttle and on the ferries, asking them what they have purchased. If you ask them in the right circumstances, they are much more open than you might think they would be likely to be. We also have covert operations, and I would prefer not to go into the detail of how those covert operations are undertaken, but they are undertaken five times a year, they are very detailed, they have a consistency because they have now been running for nine years. We measure all sorts of details—registrations, indications of plates, et cetera—which is why we can say we know with certainty there is greater involvement of criminality, criminal gangs, because they have shifted away from ferries to the Shuttle because it is quicker, you can turn the vehicles round, you drive to a layby in Folkestone, off-load the Mondeo or Volvo estate, stick it on a trucker and shunt it straight through to Glasgow. You have to monitor it somewhere along the chain as well. So the scale of the criminal operation is substantial but Customs and Excise certainly accept our figures.

  Customs and Excise only monitor the figures once a year, so they rely fairly heavily on our figures, and they have verified the details. Can I turn to the question you asked about youths? We knew criminal elements were getting heavily involved. We discussed this with Home Office ministers, we have been doing that for several years, and now I think many of you, as Members of Parliament, will acknowledge that in your sink estates—and people will say there are not many sink estates in the New Forest but there are in other places—people can buy off the back of vans. What we wanted to do was try and identify the quantity of this and the scale of it, so for the first time ever, just before Christmas, again under Market Research Association rules, we had a mass telephone process which we did not undertake, one of the big, reputable research companies undertook, and they got parental permission to interview children of 15, 16 and 17 confidentially. What we found was, including all alcohol although we did break the issue down into beer as well, depending on the nature of the question asked, you got an answer rate of up to 50 per cent of the children were answering, yes, they knew where they could get beer or alcohol from houses, garages, cars and vans. This survey did not take place in Scotland, we had to keep it to a limited number and we did eight cities which included Cardiff, Sheffield and Manchester. The other striking thing about that survey was that in fact the problem was greater in the leafy suburbs than it was in the sink estates in terms of knowing where to get illegal product. We are talking here about 15 year olds. We are giving these figures to the Home Office because we consider them to be so significant. We have provided them also to Customs and Excise. There is clear evidence of the involvement of criminal gangs marketing alcohol to 15 year olds.


  269. What estimate do you have of the cost in terms of jobs as a result of smuggling? What more can the Government do? How effective is confiscation of vehicles, for example?
  (Mr Hayward) Confiscation of vehicles is effective only up to a point because one of the change of habits, and these are the sorts of indications we get about the involvement of criminals, is instead of having them spread over a period of time during the day they now all go at the same time in the full knowledge there are only so many Customs officials at Dover, so your chances of being picked up are minuscule. They are all concentrated between one and six o'clock, there is virtually no illegal trade before one o'clock in the morning and it finishes at about six or 6.30. They have done the full calculations. It is a very complicated process. There are some things which you can tackle but it is at the fringe. It is one of the reasons we think that a small reduction in duty is actually quite key because the margins they are operating to are relatively small and, therefore, if you take a small amount off the top of that price you deter substantially the criminal elements because they do have the transport costs, they have to undercut the market, so the total margin between British and French duty, 29p, if you take off 10p probably for transport costs and shelling money out to the drivers, etc., and then there is the undercutting cost, it is probably only about 10p that they can make as a margin. So if you can undercut that on our products then it would have a fairly substantial contribution not only to our industry but to society. On your specific question about employment, we have done some projections, they are figures that the Treasury do not accept and we are looking at these at the moment to see if we can come back with some serious ones. We know that there is a knock-on effect in terms of the employment in pubs as well as breweries but being precise about it is a difficult one. What we would say is that unlike other elements of the industry, alcohol and tobacco, Customs and Excise accept with us that probably only about 15 per cent of the product is re-exported, in other words produced in this country, 85 per cent you are importing from a Belgian or a French brewery. That is 85 per cent of the production of the illegally imported product which is not creating any form of British jobs, it is a straight loss to the economy, a straight loss to the revenue.

  270. Are we talking about hundreds or many thousands of jobs?
  (Mr Hayward) Thousands without any shadow of a doubt, it is only a question of how many thousands.

Sir Robert Smith

  271. Unfortunately three little things came up there. One is with the young people, young people cannot buy alcohol anywhere but illegally so I do not know whether you have done a break down of how much of that is young people buying illegal alcohol that is actually sourced in this country and how much is buying it from elsewhere. The second one, given this talk about brand loyalty, if it is an overseas brand that is being smuggled in—this may be a red herring—is it substituting for a brand that would have been imported anyway? The final question is when we were on our visit to Glasgow, the other part of criminality that came up there was actually exports that never make it out of the country but are being diverted. They are bonded and should be leaving the country but somewhere along the way they are hijacked in a sense and are then sold, so you do not have even have to cross the Channel for the criminality to avoid the duty.
  (Mr Hayward) I will answer the third question and ask my colleagues to comment on the question of brand loyalty. This survey throws up questions for us as an industry because it also highlights that 16 and 17 year olds can buy the product illegally from pubs or off-licences and the like and we have got to tackle that and they are issues on which we are in discussions with Government in general because we all know that youngsters buy alcohol. The really frightening figures here are the 15 year old's knowledge of where they can get it through criminal sources. We know that criminals do not let go of the people that they have got hold of and it is the potential to take it on to drugs and those sorts of things which we really are throwing up. I would emphasise that although this is a Scottish Affairs Committee, and I indicated that this survey was undertaken in England and Wales, what was significant was the level of the problem was the same in Manchester and Sheffield, which were the most northerly cities, as in Maidstone where we did the surveys. Sorry, the third element, you asked about brand loyalty.

  272. It is a slight red herring.
  (Mr Hayward) Export fraud. Because of the sheer scale that we know comes in from abroad it is actually at a very, very low level in our case because we are talking about a very bulky product.
  (Mr Stewart) The middle one on brand is price and availability, not on brand.

  273. The element of the criminality that deals with the diverting of exports, in other words stuff produced in this country for export that does not make it abroad and therefore has not had duty paid, is there any barrier to you marketing products for export only?
  (Mr Stewart) Usually they are labelled "for export".
  (Mr Gibb) Apart from anything else, in this context you have got an EU problem in terms of goods that are available for sale in any part of the EU are valid anyway. Were it non-EU imports, which I know is an issue in the context of tobacco where quite a lot of it comes outwith the EU, then that is a much more practical solution. We are simply talking about cross-EU products so effectively anything is legit.

  274. The point that was made to us in Glasgow was that beer produced in this country for export was put on a lorry, sealed up, and therefore did not have any duty paid on it, the lorry then went off, the paperwork got changed and the beer was sold in this country and never made it out of the country.
  (Mr Gibb) There is an element of that and there is a fraud committee working with HMCE and the BLRA.
  (Mr Hayward) It is less of a problem for ourselves than it is for possibly the whisky industry. Can I just make a comment in relation to marking things for export? I represent both pub companies and also the brewers both large and small. For the large companies that is far less of a problem than it is for the small ones. For a small company they have very limited runs. If you start implementing yet further runs because you have got to label things in different ways then you lose the flexibility that a small producer would normally have to an even greater extent.
  (Mr Stewart) The reduction we are looking for we believe will come back in terms of the duties to the Revenue through increased volume consumed in the UK. It is Rob's job to prove that to the Treasury. Needless to say the Treasury are reluctant to accept that at this point in time but that is the area of activity that we are pressing hardest upon because we do not believe it is just a given from the Treasury.

  Chairman: It may be worth trying for one year anyway. We only have about three questions left. We will move on to soft drinks.

Mr Brown

  275. Before I ask the question on soft drinks, I actually held an adjournment debate some weeks ago on the issue and you have mentioned about youngsters and alcohol and I can tell you it is ten and eleven year olds who are into tobacco products, that is their starting point and they are already there. To move on to soft drinks, the Association has said that it aims to be "a major contributor to the economics and social well-being of Scotland". One of its real objectives is to "foster co-operation between its members on matters pertaining to the brewing industry and licensed trade in Scotland." Quite simply, to what extent does the licensed trade "co-operate" in order to sustain the high price of soft drinks in pubs?
  (Mr Stewart) It does not. It goes back to the characteristics of the free trade in Scotland. It is set by individual retailers whatever the price of a soft drink is. Indeed, it is no different from beers or wines and spirits. It is very much an individual issue. There is no large enough group available to dictate what the retail price of soft drinks should be.

  276. Could I add on the back of that, do you find it worrying at all that here we are in 2001, we have just come through a festive season when we have tried to encourage people not to drink and drive, and I think people do act sensibly in this country today where if you have a car load of people one of them will decide it is their turn, and you actually find that soft drinks are more expensive than alcohol in some pubs? Do you find that a worrying aspect?
  (Mr Gibb) If the price becomes disproportionate then it is clearly a worrying aspect but in the end the pricing of beverages in a pub is about the total cost estimate of the pub of which the in-cost of the beverage is relatively low. In that sense the pricing is about a set of cost factors. If we get to a point at which the price is disproportionate then, yes, that is a worrying factor. People are paying to be in the pub, to have those amenities, and they will pay it across all the elements that are there.
  (Mr Hayward) Can I make an observation in general about it. Mr Brown, I did read the adjournment debate and appreciated many of your comments. In terms of pub pricing there are a number chains who have now chosen to alter their price structure. The other observation I would make is that it is quite interesting that actually the product that is growing most rapidly along with food is soft drinks in pubs which may result in a variation in price structures anyway because, as has already been indicated, ten or 15 years ago people solely went in there to drink beer or to drink whisky or whatever. People now go into a pub or a bar for a very different experience and if the pub owner does not change accordingly people will actually go elsewhere. On soft drinks it is quite marked, the increase in sales of soft drinks in most pubs and bars nowadays.

Mr Clarke

  277. It must be more profitable for them to do that. It is robbery without violence. Seriously. You go into a hotel and a dash of cordial in your drink, and you are better buying a bottle of whisky. You are all laughing but it is true. The big conglomerates are involved in this and it is a conspiracy against the customer. One of the reasons people are drinking at home is they are buying soft drinks or anything else and drinking it at home because they say "what?" for a Coca-Cola and sometimes it is not Coca-Cola but some Coca-Cola make-up.
  (Mr Hayward) I would make the observation that the circumstances are changing. People are clearly conscious of the price of soft drinks because they can buy it, and regularly do buy it, in supermarkets. People generally do not work out how much the peas that are on their plate in the same hotel actually cost when they are having their meal.

  Mr Clarke: They do where I come from.

Mr Brown

  278. I used the word "co-operate" not "conspiracy".
  (Mr Stewart) There is no co-operation, it is completely and utterly unmanageable.


  279. The final two questions. It was mentioned several times this morning that the structure of pub ownership in Scotland is different from that in England. Can you very briefly explain how it differs and why this should be?
  (Mr Stewart) I think it is history. It goes back very many years when there was a very vibrant, free trade market with individual ownership in Scotland. We had more pubs in Scotland ten years ago under direct ownership than we do today. I think it is history. The English brewers bought up pub estates and we did not do that in Scotland. We have a history of exporting. S&N exported to India, England, around the world in the last century and that was very outward looking at that time. That is the real reason as to why we have a very different structure in Scotland.

6   See evidence, pp 103-104. Back

7   See evidence, pp 94-103. Back

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