Memorandum from the Gin and Vodka Association
of Great Britain
Contribution to the Economy
More than 2,000 people directly employed.
Supports a further 8,000 jobs across the UK.
Together with Scotch whisky, supports 10 per
cent of agriculture jobs in Scotland and provides work for one
in every 54 Scottish jobs.
Growth in Production in Scotland
Gin and vodka are now the largest sector in
the UK spirits market.
Vodka is the fastest growing category of major
spirit drink in the UK.
Over 75 per cent of UK gin and vodka now produced
Prime example of relocation to Scotland to improve
cost of output.
Relocation paid by export earnings, not from
returns from UK market.
Cumulative Burden of Taxation and Regulation
Historical duty discrimination against spirits
compared to other alcohol drinks.
Government standstill on spirits duty acknowledged
this but only a step.
Duty already at point of tax maximisation.
Other countries do not discriminate against
their major indigenous industry.
Recommendations: Support for further standstill
to reduce duty differential,
Reduce net cost to industry of Climate Change Levy.
Exports and Trade Barriers
Annual exports of £200 million to more
than 200 markets worldwide.
Exports up by 50 per cent compared to 1995.
Discriminatory taxation against gin and vodka
particularly in Canada, China, Czech Republic, India, Mexico,
New Zealand, Poland, Romania, Russia and Turkey.
Recommendation: Seek Government to apply pressure
on Accession countries to remove barriers and import tariffs prior
to joining EU.
1. The main objective Gin and Vodka Association
is to represent, promote and protect the UK Gin and Vodka industry.
The Association has 24 member companies. These range from large
multinational companies (MNCs) in the FTSE 100which include
the biggest spirits companies in the worldto small members
with less than 12 employees in the whole production process. The
Association covers over 95 per cent of UK gin and vodka production,
with our members accounting for 76 brands. Although members' sites
stretch from Plymouth to Invergordon, a major relocation of facilities
now means that some 75 per cent of UK gin and vodka is produced
2. Noting the Committee's responsibility
for reserved issues, the active interest of Westminster in the
affairs of the spirits industry remains crucial given that two
of the major issues which impact on the industry, excise duty
and international trade, continue to be the responsibility of
the Westminster Parliament. The Gin and Vodka Association therefore
welcomes the Committee's inquiry, and the opportunity to provide
evidence to it.
3. Domestic sales of gin and vodka now account
for the largest sector in the UK spirits market. Seventy per cent
of UK produced gin is exported and rather less of vodka. In addition,
UK-owned companies produce over twice as much overseas150
million litresfrom which earnings are repatriated. Our
members contributed £700 million in UK excise and VAT in
4. Employment and Social Affairs. The gin
and vodka sector is a major employer with 2,000 directly and 8,000
indirectly. The spirits industry as a whole generates employmentdirect
and indirectfor over 60,000 people. The industry has actively
participated in Government employment initiatives, Social affairs
programmes and in the promotion of its Sensible Drinking Message.
The Association supports the industry's self-regulation of promotion
5. Good Practice: Improving Industrial Clusters
and Refocusing. The Government has placed much emphasis on the
development of industrial clusters as a way of maximising UK international
competitiveness. Already the spirits sector has done much in this
direction in Scotland, where we have a classic example of an industrial
cluster with a well-developed network of local suppliers. At the
same time, many of our member companies have refocused their activities
and rebuilt their core activities around the successful end of
the spirits market. This refocusing has met the pace of change
6. Growth in Production of Gin and Vodka
in Scotland. Extra investment has now improved this rationalisation
further in our major companies. A major relocation of facilities
has recently been completed to Scotland. This means that some
75 per cent of UK gin and vodka now comes off the bottling lines
7. Contribution to the Scottish Economy.
Looking at the overall spirits industry in Scotland, where it
supports some 40,000 jobs, one in 10 of agricultural jobs are
already supported by the spirits industry.
The gin and vodka sector's impact in Scotland has increased this
year due to the restructuring outlined above. But this does not
mean that our sector is restricted to the main industrial belt.
For example, one producer has expanded his employment in central
Ayrshire where the coalmines have declined and agriculture is
8. The Rural Economy. The UK makes over
45 million litres of grain neutral alcohol per year for gin and
vodka. Last year, this required 130,000 tonnes of wheatwhich
in turn meant that nearly 50,000 acres of UK arable was connected
to the non-whisky trade.
Overall Fiscal Environment
9. The UK gin and vodka industry is a large
export earner worth over £180 million. The Association was
pleased that the Chancellor made the point in his 1999 Budget
speech that it will be even more important to hold to our course
of stability in the UK when there is a background of uncertainties
elsewhere in the world. Gin and Vodka have certainly experienced
these difficulties. But, much as we desire stability, the fact
is that our home market has been far from robust in recent years,
and it is being disadvantaged by the tax system imposed by our
home country. Three examples illustrate this:
Funding of restructuring of industry.
The major developments in our industry, notably the restructuring
in Scotland, have been funded largely from export performance
and not from the much more limited returns in UK.
Cumulative Burden of Taxation and
Regulation. Taxation changes in 1999 are creating additional costs.
These especially disadvantage our smaller UK based companies when
compared to their continental counterparts. However, the major
concern is the discrimination against our products due to excise
duty in favour of other drinks. This is covered further below,
as is the impact of the climate change levy. Additionally, the
better allowances and reductions offered to our competitors elsewhere,
still make the "effective" rate of UK Corporation tax
disadvantageousnotably if compared to Holland, Belgium,
Ireland and USA.
Major companies are now producing
gin and vodka elsewhere. The fastest growing London gin in the
world is being produced in Poland. The contract for new premium
brand vodka has gone to Holland. A further company has acquired
a distillery in Romania. Due to the loss of export refunds, one
company is considering sourcing cereals from outside the EU, and
another is considering moving part of its production overseas.
Additionally, imports of French produced vodka have increased
50 per cent in the last year.
Foreign Subsidies. Gin and vodka
are produced from neutral alcohol. At least 65 per cent of neutral
alcohol traded on the world market originates from countries that
subsidise their domestic production. This subsidy exceeds the
fixed costs of production in these countries, providing significant
competitive advantage against unsubsidised UK alcohol manufacturers.
10. Discrimination. Quite simply, the actual
rates applied to three typical pub servings all containing the
same amount of alcohol are 27.38p for spirits, but only 19.30p
for wine and 16.65p for beer. Nearly 70 per cent of the off-the-shelf
price of a bottle of gin or vodka is tax. When comparing UK rates
with those in other EU countries, only Sweden, Finland and Denmark
have higher rates on spirits, and all three have government reviews
in hand. It is inconceivable that wine-producing countries such
as France would tax their own indigenous industry in such a discriminatory
11. Duty Standstill. The Association has
much appreciated the duty freeze in recent UK Budgets that have
recognised this discrimination and begun to rectify it. It is
fully realised that the Chancellor can only adjust such taxation
over time, but we are now seeking the support of the Scottish
Affairs Select Committee to make representations to further reduce
12. Impact of Tax. In brief, the higher
the duty, the higher the price, and the greater its price sensitivity.
Two major studies have been made available recently. The Institute
of Fiscal Studies
confirmed last year that it cannot be rejected that the current
rate of tax is at the revenue-maximising rate, implying that an
increase in duty on spirits is likely to decrease tax revenue.
Given this result, and the bias against spirits in the amount
of duty imposed per unit of alcohol when compared with other types
of alcohol, the IFS reports that there may be a case for not increasing
the tax rate on spirits any further if the Chancellor does not
want to lose revenue. Even more important due to its sophisticated
modelling, is the second study by Professor Chambers (University
of Essex) for HMC&E. This gave robust results for spirits
and confirmed that they are more price sensitive than other alcohol
drinks and are all but at the point of revenue maximisationespecially
if the bracket of error is included.
13. Recommendation for Action. Both studies
lead, therefore, to an important deduction. An increase in taxation
may cause a reduction in resultant tax revenue. We urge the Committee
to press this point with the Treasury, and, on behalf of the industry,
to make the parallel point that any increase in taxation may cause
a reduction in spirits sales that will severely hit the home base
of a major UK exporting industry.
14. The European Commission has at last
started a long overdue review of the minimum excise rates that
Member States can charge on alcohol drinks in the EU. This is
due to report in Spring 2001. This Directive was in itself a disappointment
after states could not agree on either duty ceilings or even targets.
As a result, discriminatory taxation was allowed to continue against
spirits, with the majority of the wine producing countries imposing
no tax at all on wines. Additionally, major tax differentials
between countriessuch as that between Sweden and Denmark,
and UK and Francehave been allowed to persist, albeit that
these differences in rates are self-evidently the prime cause
of illegal production, smuggling, fraud and cross border shopping.
15. Recommendation for action. The Association
recognises that completion of the single market and total harmonisation
of duties is unlikely to be achievable in the short-medium term.
But we will be urging the Commission to seek reductions in excessive
taxation and major areas of differential; and not to apply revalorisation
in line with inflation as this would be discriminatory against
spirits in the Mediterranean states that apply no duty on wine.
Although the UK government has already indicated that it would
like to see a narrowing of the duty discrimination contained within
the EU minimum rates structure, we seek the Committee's support.
16. Our companies support the aims of the
Kyoto Summit. Many have already taken impressive measures over
several years to improve their energy performance, including using
renewable energy sources and combined heat and power. The Association
appreciates the Chancellor's announcement in his November pre-Budget
report of increased support for energy efficiency schemes and
the increased discounts on the levy to an energy intensive industry
such as ours. But the complex and illogical eligibility rules
mean that a number of our sites will not receive these discounts,
notably those with bottling and packaging separated from their
distillery. Importantly, nearly all our small and medium sized
companies have chosen not to join the scheme and to accept the
extra levy, due to the extra costs and bureaucracy compared to
the benefits and discounts.
17. Recommendation for Action. To press
the Chancellor to adjust the levy and eligibility to it in order
to reduce the considerable net cost to our industrynot
least due to the bureaucracy involvedparticularly as this
will disadvantage us compared to our EU competitors.
Cross Border Shopping
18. Recent Customs estimates indicate that
the revenue lost due to cross-border shopping in spirits in 1998
was £50 million.
suggest that consumers are now becoming ever more aware of the
price advantages of Calais. Typically, a bottle of gin costing
£10.50 in this country will cost £7 in France. The consumer
is now looking to import up to 10 litres of spirits per journey,
albeit duty paid at the low French rates.
19. HM C&E also recently estimated the
revenue evaded due to smuggled spirits to be £20 million
in 1999 and that lost to be £15 million.
These initial figures suggest a small but welcome reduction perhaps
due to HM Customs and Excise's success in countering paper fraud
and criminal diversion. The estimates do not, however, include
freight smuggling of alcohol, which our members believe to be
specially significant for spirits. Our smaller companies continue
to express concern at the costs our legitimate traders may be
expected to bear from new control chargesparticularly when
a principal cause is the high rate of excise in the first place.
20. Recommendation for Action. The Government
have recently commissioned an independent investigation into Customs
control regimes, lead by John Rocques. However, although this
Association originally raised the issues concerned with the Chancellor
in person, this facility has not been offered to us by this investigation
who have only held one brief short-notice meeting with a two-man
delegation from the whole industry. We have joined with the Scotch
Whisky Association in expressing concern at "solutions"
which merely address symptoms and not causes, particularly those
which impose additional costs, controls and burdens on the legitimate
trade instead of focussing on the best ways to tackle the illegal
trade. The Association and our members remain keen to assist HMC&E
especially in the Cross-Border Shopping Working Group and in the
Joint Alcohol and Tobacco Consultative Groupboth of which
now have their future in doubt.
21. Recommendation for Action. We urge the
to impress on the Treasury that the
prime cause of these practices is the high UK duty rate compared
to our neighbours;
to press HM Customs and Excise that
the only way to ensure that new measures are optimal and cost-effective
is by maintaining open dialogue with the legitimate industry;
on behalf of our small member companies
seek fair treatment with respect to the monetary "guarantees".
HM Customs and Excise call in the latter if exports fail to arrive
at their EU destination, even if the original producer has shown
due diligence in complying with what are frequently inefficient
or out of date customs controls systems.
22. Overall. UK gin and vodka exports are
worth approximately £200 million and go to over 200 markets
worldwide. UK Gin exports to the EU have increased by nearly 50
per cent since 1995, and have remained steady to the rest of the
world. UK Vodka exports to the EU have expanded by over 40 per
cent since 1995. UK Vodka exports to the rest of the world have
expanded six-fold since 1988, but they were even higher between
1993-96 due to exports to Russia, but then fell by £9 million
due to the latter's economic crisis and difficult trading conditions.
23. One difference from Scotch whisky is
that only Plymouth Gin has a geographical designation, which restricts
their production to that area. All other UK gin and vodkaincluding
London Gincan be produced anywhere in the world. Thus,
UK owned companies produce over twice as much overseas150
million LPAfrom which earnings are repatriated. Additionally,
no maturation period is required for gin and vodka. But law requires
that the neutral alcohol must be produced at a different site
from the finished product.
24. It is vital that the industry has open
access to these markets. Typically, a small company producing
a premium brand but with no overseas production facilities, will
be the most affected. Unlike Scotch whisky, he may be competing
in country with like products (that is, non-UK gins and vodkasfor
example, Polish vodka in Poland). Although there are tariff barriers
in some 140 countries, there is discriminatory taxation against
UK/EU gin and vodka particularly in:
Canada, China, Czech Republic, India, Mexico,
New Zealand, Poland, Romania, Russia and Turkey.
25. Government Support. The DTI and the
European Commission have been fully supportive of our efforts
to remove these barriers, in conjunction with the Scotch Whisky
Association and Confederation of European Spirit Producers. Negotiations
with Mexico and China have been recently successful, whereas those
with Poland and Russia have been extremely slow.
26. Recommendation for Action. We seek the
Committee's support in pressing for ongoing negotiations and to
avoid trade retaliation from either side wherever possiblenotably
with Russia and the USA. We are particularly reluctant to see
settlement with the EU Accession countries unless the new tariff
is common for all spirits, non-discriminatory compared to their
own white spirits, and without derogation or extended implementation
27. Background. Export refunds compensate
EU food and drink manufacturers for having to buy cereals, and
other agricultural raw materials, at higher prices due to the
price support mechanisms of the Common Agricultural Policy (CAP).
They enable the industry to compete in non-EU markets on equal
terms with producers from outside the EU who are able to purchase
their cereals at generally significantly lower world prices. At
the end of last year, the Commission, against a background of
WTO limitations on refund expenditure and budgetary pressures,
made proposals to reduce significantly the expenditure on refunds.
Given these pressure, the Association accepted the need for review
and understands that refunds are not necessary where EU and world
prices are the same.
28. Discriminatory Action by the European
Commission. Reductions in intervention prices have meant thatfor
the time beingUK/EU barley and wheat prices are now close
to world prices. As forewarned by the GVA, the Commission will,
therefore, be making savings on export refunds in any caseparticularly
because they have arbitrarily changed their method of calculation.
However, we have strongly maintained that their reductions have
not been fairly apportioned, and intervention pricing in other
CAP commodity regimes has not been reformed in the way it has
for cereals. In brief, the UK spirits industry has been targeted
in a disproportionate manner. One consequence is that UK companies
will not be looking actively at producing overseas. Another will
be that they may source their cereals or neutral alcohol from
abroad, especially where countries (such as USA) heavily subsidise
29. Recommended Action. The UK government
gave the industry support in this case, and secured a Commission
commitment to review the impact of these changesin due
course. However, negotiations are proceeding slowly on the sister
arrangement of Inward Processing Relief (IPR). This allows limited
access to world raw materials markets, without payment of import
levies, for manufacturers who are producing goods for re-export
to non-EU markets. The Association seeks the Committee's support
for gaining due access to IPR for those who have suffered from
the loss of Export Refunds.
30. The Association is pleased to make this
submission to the Scottish Affairs Select Committee. We particularly
seek your support on the issues relating to the high rate of Excise
duty on spirits. The Association would be delighted to discuss
with the Committee any points raised in this paper on which the
Committee may wish to seek further details.
The Gin and Vodka Association of Great Britain
1 Report by Fraser of Allandar Institute, University
of Strathclyde. Back
Crawford, Smith and Tanner (Institute of Fiscal Studies) (September
Customs and Excise estimated figures issued 26 November 1999. Back
BLRA survey January-June 2000 compared to same period in previous
Customs and Excise estimated figures issued 26 November 1999. Back