Select Committee on Scottish Affairs Appendices to the Minutes of Evidence


Memorandum from HM Customs and Excise



  This memorandum explains the United Kingdom's alcohol excise duty structures with particular emphasis, as requested by the Committee, on beer and spirits; the European dimension; and cross-border activity. The memorandum comprises the following main headings:

    —  Section 1: Alcohol excise duties—General.

    —  Section 2: Alcohol excise duties—spirits and beer duty.

    —  Section 3: Cross-border shopping, smuggling and fraud.


  1.  Excise duties provide an economical means of raising revenue and the United Kingdom is a strong proponent of their use. The price elasticities of demand are relatively low, particularly for beer and wine, and in many cases the expenditure is of a discretionary kind. In the financial year 1999-2000 alcohol duties raised £6,426 million and total tax receipts, including VAT, came to £11,280 million. Receipts for each category of drink since completion of the Single Market are shown in the following table:
£ million
£ million
£ million
£ million
£ million
£ million
£ million
Spirits1,7071,776 1,6531,5931,546 1,6431,804
2,5342,642 2,6292,6962,702 2,813
Wine1,0821,139 1,1871,2741,363 1,4811,654
Cider101112 134135137 140155
Total duty5,172$
5,5605,617 5,6315,7425,966 6,426
VAT*3,6303,820 3,8804,1404,340 4,4604,810
Total tax8,800$9,380 9,5009,77010,080 10,43011,240


$The introduction of end product duty for beer in 1993-94 led to a reduction in receipts of approximately £200 million in that year.

  *Estimate of VAT based on data from Office for National Statistics for household expenditure on alcoholic drinks.

  Note: Due to rounding of figures, components may not sum to the totals shown.

  p = provisional figures.


  2.  The structures and rates of excise duty on alcohol and alcoholic beverages are set down in European legislation[91]. The Structures Directive defines the various categories of alcohol and alcoholic beverages (ethyl alcohol/spirits, beer, wine, etc.), the method for establishing duty and makes provision for certain special cases, for example exemptions for specified purposes e.g. (denatured alcohol, medical purposes, etc.). The Rates Directive sets down the minimum rates of duty that Member States are required to apply to each category of alcohol or alcoholic beverage. Details of the minimum rates are shown in Annex A.

  3.  The Rates Directive provides that Member States are free to set excise duty rates at levels they feel are appropriate to their own particular circumstances, subject only to the agreed minimum rates. (This was tested and effectively confirmed in the recent Shepherd Neame judicial review case[92]). However, as a result of a 1983 ruling in the European Court, the duties on beer and table wine are linked in a broad ratio of 3:1, by volume, or 1:1 on a unitary taxation basis. Further, under the terms of the Rates Directives the Commission is required every two years commencing 31 December 1994 to examine the minimum rates of duty and report to Council and, where appropriate, make proposals for change. The first report, which appeared in 1995, made no proposals for change but merely analysed the position highlighting potential problems and concluded that detailed consultation with national administrations and others was necessary to allow more detailed analysis of all the relevant issues and the implications of any adjustments.

  4.  As part of the consultation process an EU-wide conference took place in Lisbon in November 1995 where the UK argued that the immediate way forward should be to allow Member States a continuation of fiscal sovereignty, but underpinned by a regime of sensible and realistic minimum rates (including the abolition of the zero rate on wine); the UK also argued that the present minimum rate for spirits was too high compared with the rates for other drinks and that effectively acted as a discriminatory barrier to EU trade in spirits. It should be noted, however, that the Commission has failed to come forward with either its 1996 or 1998 reviews. At the ECOFIN in March this year, the Commission gave a commitment to undertake both a study on the competition aspects between the various categories of alcoholic drinks and a consultation exercise and have promised to produce a report by the end of 2000.

  5.  The 2000 review has since begun with the Commission issuing a questionnaire to all Member States (on 11 July) and appointing a UK Consultancy, Customs Associates Ltd, to undertake the competition study. The questionnaire is to be returned by 20 September and will serve as a basis for bilateral discussions between the Commission and each Member State, to be held from October onwards.

  6.  The questionnaire is grouped around four themes: the proper functioning of the internal market, competition between the different categories of alcoholic drinks, the real value of the rates of duty and the wider objectives of the Treaty, the questionnaire also covers the alcohol structures. While not required under the terms of the Directive, the Commission feels that possible problems related to the classification of products in one or other category cannot be dissociated from the rates issue.

  7.  We understand that trade involvement in the review will be through the European trade associations. This will include trade views on the issues to be covered in the report as well as statistical information on consumption and prices. In the interim we have copied the questionnaire to the main UK alcoholic drinks trade associations and invited comments.


  8.  Current UK excise duty rates and the incidents of tax (duty and VAT) on various items are shown in Annex B. Comparative excise duty rates for beer and spirits (in sterling) for each EU Member State are shown in Annex C.


Spirits duty

  9.  Spirits are the most heavily taxed of the alcoholic drinks. However, in recent years the real value of duty on spirits has fallen almost continuously, including as a percentage of the retail price—duty freezes in the last three Budgets were cuts in real terms. The real value of tax (duty and VAT) on a (nominal) 70cl bottle of whisky at 40 per cent strength has fallen from £7.97 (at January 2000 prices) in January 1989 to £7.07 in April 2000. As a percentage of the retail price this represents a fall from 66 per cent in 1989 and to 62 per cent in April 2000[93].

  10.  Spirits are the most price sensitive of the alcohols. Research suggests that the own-price elasticity of demand for spirits is about -1.4[94],[95]. The elasticity, plus what we know about the proportion of price accounted for by duty, determines whether an increase in the duty rate will increase or reduce revenues.

Beer duty

  11.  Beer duty is based on the quantity and alcohol strength of the beer and the rate of duty applicable when released for consumption. Compared to duty rates in June 1993 excise duty on beer has fallen in real terms by 6 per cent. In addition, the proportion of tax (duty and VAT) to the cost of a pint has also fallen. In 1993 tax on a pint of bitter in a pub represented 33 per cent of the retail selling price. As at April 2000 this has dropped to 30 per cent.

  12.  Research suggests that the own-price elasticity of beer is --0.59. This means that a 1 per cent increase in the price of beer reduces demand for beer by 0.59 per cent.


  13.  The following tables show recent trends in clearances of beer and spirits for the UK as a whole:

1990-911991-92 1992-931993-94 1994-951995-96 1996-971997-98 1998-991999-2000p
Beer2,5822,519 2,4182,3532,415 2,4622,4322,480 2,4382,477
Spirits987888 863850887 814823810 840926

  p = provisional figure.

  14.  The brewing industry dominates the UK alcohol market although its share has been in gradual decline for many years, principally as a result of changing consumer tastes and social trends. Beer currently accounts for about 50 per cent of all clearances, measured in terms of pure alcohol content.

  15.  Total spirits clearances have also fallen over the same period (and for the same reasons) and now account for about 18 per cent of all clearances, measured in terms of pure alcohol content. Although still holding the greatest single share of the domestic spirits market, consumption of whisky has been declining until very recently—clearances have fallen by more than six per cent over the last 10 years. White spirits, vodka in particular, although not immune to the long-term consumer trend away from spirits are, however, enjoying a period of relative growth.



  16.  Within the brewing sector, 37 of the 498 breweries registered for excise purposes in the UK are located in Scotland. Between them, in the financial year 1999-2000, they paid approximately £353 million in excise duty (about 13 per cent of the total UK beer duty receipts).

  17.  The UK spirits industry is highly concentrated with some 95 per cent of total potable spirits currently being produced in Scotland. Within the sector, whisky makes a significant contribution to both the regional economy of Scotland and to the national economy, including to the UK's balance of payments; nearly 90 per cent of whisky sales are for export. In the financial year 1999-2000 domestically produced whisky (including Northern Irish whiske) accounted for some £630 million, or 35 per cent, of UK spirits duty receipts.



  18.  Until completion of the Single Market on 1 January 1993, cross-border traffic was regulated by a strictly enforced system of frontier controls for both personal and commercial importation's of excisable goods, supported, in the case of goods for personal consumption, by objectively defined limits. Within these limits excisable goods could be imported free of duty and tax; above the limits goods could be imported in unlimited quantities provided, of course, that UK duty and tax were paid. These limits applied to both goods purchased duty-paid abroad, and those bought duty-free.

  19.  The Single Market brought with it the abolition of routine frontier controls over both private and commercial traffic and of the strict personal allowances for intra-EU travellers. Since then there has been a rapid rise in both legitimate cross-border shopping and cross-Channel smuggling of excise goods.


  20.  Since completion of the Single Market, travellers have been allowed to bring back to the UK quantities of excise goods, duty and tax paid in the Member State visited, without incurring any charge to UK duty and tax provided that the goods are for the traveller's own consumption and are personally transported by the traveller. To assist the tax authorities in determining whether the goods are for "own consumption", the European Council of Ministers agreed to the adoption of "guidance levels" (also referred to as "minimum indicative levels"). These are set out in Annex D. Below the levels, the goods are presumed to be for the traveller's personal use unless the authorities can demonstrate otherwise; above them, the onus is on the traveller to demonstrate (if asked to do so by the authorities) that he or she has no commercial intentions with regard to the goods. If he or she cannot do so, the goods are liable to payment of duty in the country of importation or seizure, subject to the normal appeal mechanisms.

  21.  The Government of the day recognised that these new rules would lead to an increase in cross-border shopping and, for the first full year (1993-94) made Budgetary provision for an additional revenue loss from legitimate cross-border shopping of £250 million for alcohol and tobacco, over and above the existing revenue lost. Estimates of actual revenue losses for the three years to 1998 are shown in the following table. Figures for 1999 are not yet available.

Product Type1996
£ million
£ million
£ million
Beer4550 55
Wine100140 180
Spirits4550 50
Tobacco Products5060 85
TOTAL235305 375


  Figures have been independently rounded to £5 million. Components may not therefore sum to the totals shown.

  The figures shown for revenue lost use Customs' assumption that between 70 per cent and 80 per cent of all alcohol purchased abroad substitutes for similar purchases in the UK (100 per cent assumed for tobacco products).

  22.  The cross-border shopping estimates are based on Customs' own analysis of the International Passenger Survey (IPS). The IPS is a continuous survey of international passengers at various seaports and airports conducted by the Office for National Statistics. Customs sponsor a question on the IPS asking about expenditure on alcohol (and tobacco) purchased duty-paid in other EU states by UK residents. These expenditures are then grossed up to produce the National totals once any potential smugglers have been removed from the dataset.


  23.  There has, in recent years, been a rapid growth in alcohol and, particularly, tobacco smuggling. Smuggling essentially arises as a result of price differentials arising from a variety of factors.


  24.  The three main types of fraud threatening alcohol revenues are:

    —  cross-Channel smuggling of duty-paid goods—mainly beer—(the so called "white van" trade) where goods bought in other Member States ostensibly for personal use are sold on in the UK without payment of UK duty and tax;

    —  diversion fraud, where commercial consignments of goods travelling duty and tax suspended are diverted onto the UK home market without payment of the duty and tax; and

    —  freight smuggling, mainly of spirits, where goods are smuggled into the UK in commercial traffic or containers.


  25.  Serious weaknesses in the excise control regime, in particular the system for the movement of duty suspended wine and spirits between bonded warehouses, have resulted in substantial losses of revenue. The bulk of these losses occurred between 1995 and 1998. Some tightening of the controls took place in 1998 such as IMPEX teams targeting duty-unpaid goods and tracing them back to their originating warehouse. In addition warehousekeepers have been made more aware of their duty liabilities in providing guarantees for the movements of duty-suspended excise goods. However, it is not clear whether these were sufficient. The Paymaster General announced on 30 June a full independent investigation into the Department's system for collecting excise duties on alcohol. John Roques, a former senior partner of accountancy firm Deloitte and Touche, is to lead the investigation and will report to the Paymaster by November.

  26.  Although media reports suggest that the losses could be up to £2 billion, Customs estimate them to be in the order of £ hundreds of millions. The National Audit Office are working with Customs to quantify the losses and identify weaknesses in the control regime.


  27.  Estimates for revenue evaded and revenue lost (both duty and VAT) through cross-Channel smuggling of alcoholic drinks for the three years to 1999 are shown in the following table. Figures for 2000 are not yet available.

Product Type1997 revenue
£ millionrevenue
£ million
1998 revenue
£ millionrevenue
£ million
1999 revenue
£ millionrevenue
£ million
Beer150110 200150215 165
Wine6045 655045 35
Spirits3525 403020 15
TOTAL240180 305230285 215


  Figures have been independently rounded to £5 million. Components may not therefore sum to the totals shown.

  The figures shown for revenue lost use Customs' assumption that between 70 per cent and 80 per cent of all alcohol purchased abroad substitutes for similar purchases in the UK.

  28.  Estimates for the cross-Channel smuggling of alcohol (and tobacco) are based on Customs' own survey of sea and Tunnel passengers conducted in June each year. Returning UK passengers are asked by a Customs Officer about their purchases of excise goods, which are then verified by a brief check. Legitimate purchases are excluded from the dataset to ensure consistency with cross-border shopping estimates. Information from the International Passenger Survey is used to gross the results up to produce National estimates.

  29.  The figures exclude any amounts for revenue evaded/lost on alcohol smuggled in freight consignments. We have not published any estimates for the extent of freight smuggling of alcohol because of problems in devising a robust measurement methodology. Alcohol is a diverse product, ie beer, spirits, etc, each with its own duty rate varying according to strength. As a result, we do not have the data to estimate reliably total alcohol comsumption and the corresponding duty liability in the same detail as tobacco. We are, however, continuing to investigate possible methodologies and data and have been in discussion with the alcohol trade about producing an overall assesment.


  30.  In 2000-01 we will deploy some 2,700 anti-smuggling officers who will target and seize fiscal goods, including alcohol smuggled in freight, and prohibited and restricted goods. In addition some 300 Inland Enforcement Officers work around the UK to disrupt the illegal distribution and retail networks by seizing smuggled alcohol and tobacco goods and prosecuting offenders. Inland Enforcement Teams (IETs) work closely with, and are supported in this work by, other anti-smuggling officers, specialist investigation staff from the 2,000-strong National Investigation Service (NIS), intelligence staff, Customs Officers and those control staff who visit traders for VAT and excise purposes.

  31.  In 1999-2000 the revenue value of alcohol detections made nationally by IETs and anti-smuggling staff totalled £50 million[99]. In addition Customs' specialist investigators (who deal with large commercial frauds by organised gangs) prevented revenue evasion on alcohol products of around £150 million. At the same time IMPEX resources, whose activities are detailed at paragraph 36 below, continued to maintain control of warehouses (in addition to excise audit staff) and detected a total of almost £7.4 million of revenue evasion on alcohol in Scotland.


  32.  As a result of concerns over the growing threat of tobacco smuggling the Paymaster General announced the Tackling Tobacco Smuggling Strategy on 22 March 2000. This strategy is designed to reverse the growing trend of tobacco smuggling within three years, and reduce it to below current levels in the longer term.

  33.  Although primarily focused on tabacco smuggling, elements of the strategy eg increased enforcement activity at the ports and inland will have an impact on other smuggled goods, including alcohol.


  34.  The measures announced in the March Budget follow on from the recommendations of the Alcohol and Tobacco Fraud review (ATFR) undertaken in the second half of 1997-98. The ATFR recommendations were aimed principally at tackling cross-Channel smuggling and internal (paper-based) diversion fraud involving alcohol. The outcome was announced in July 1998 and the Comprehensive Spending Review provided for £35 million over the three years to March 2002 to implement the recommendations of the ATFR. Money was also made available in 1998-99 so an immediate start could be made on implementation. Measures implemented include:

    —  the allocation of an additional 145 staff, the majority of which are front line anti-smuggling officers—all the front line staff were in post at the Channel ports and inland by the end of November 1998 and beginning of April 1999 respectively;

    —  a new registration system for owners of goods in warehouse which became operational on 1 October 1999;

    —  a revised prosecution policy for excise smugglers and fraudsters. Customs now urge the courts to use all sanctions available against offenders, including driving disqualification's, compensation orders and, when appropriate, confiscation orders; and

    —  new rules on the treatment of seized vehicles. Offenders now face losing their vehicles even for first offences.

  In addition:

    —  Customs are working even more closely with other agencies (Policy; Benefits Agency; Traffic Commissioners; Local Authorities; Trading Standards; Inland Revenue) to develop further a national task force approach involving closer working to bring the full weight of all available sanctions to bear against smugglers and fraudsters; and

    —  as a result of guidelines set down by the Court of Appeal on sentencing in excise fraud cases custodial terms are now awarded for revenue evasion of even a few thousand pounds with higher sentences tiered upwards.

  35.  As at April 2000 more than half the 90 or so recommendations had been implemented. Work on most of the remaining recommendations is well advanced.[100]


  36.  The ATFR measures aimed at tackling diversion frauds complement Customs' IMPEX (IMPort and EXport) initiative which began in April 1997. The initiative consists of converged, multi-functional teams, with Customs, Excise, VAT, Intelligence and Investigation resources working closely together to combat non-compliance and fraud in relation to imports, exports, and movements of excise goods. There is evidence that this strategy has been successful in disrupting the activities of the internal diversion fraudster. The fraudsters' modus operandi appears to have moved whereby the goods are actually exported before being smuggled back into the UK. This increases costs to the fraudster and the risk of the goods being detected on their return to the UK. However, Customs are still investigating the extent to which our strategy has been the key contributory factor.

  37.  Also the passing in to law of the Warehousekeepers and Owners of Warehoused Goods Regulations 1999 has enhanced IMPEX teams' ability to monitor the movements of duty suspended goods and will help them further control inward and outward diversion frauds. In addition drawback fraud (where duty paid goods are said to have been exported and the duty fraudulently reclaimed) has been successfully brought under control. This followed the setting up of a processing centre and joint work between Customs' investigators and IMPEX teams and is evidenced by the large decrease in claims since 1997 and the continued assurance of the regime.

  38.  Customs also work closely with the trade in tackling smuggling and fraud. For example, Customs' Anti-Smuggling Division regularly meets with the "Excise Alliance" (which is made up of members of the alcohol and tobacco trades), both nationally and regionally, to share information on excise fraud and smuggling and to update members on successes in combating excise fraud. Members include the Scotch Whisky Association and the Scottish Licensed Trade Association.

HM Customs and Excise

September 2000

Annex A

Spirits550 euro per hectolitre of pure alcohol
Intermediate products45 euro per hectolitre (ie fortified wines) of finished product
WineZero rate
Beer1.87 euro per degree of alcohol of finished product per hectolitre (or 0.748 euro per hectolitre per degree Plato)

Annex B

RateDuty cost on measures
Spiritsper litre of pure alcohol
per 70 cl bottle
@ 40%
Wine or made wineper hectolitre per 33 cl bottle
exc 1.2 per cent—ne 4 per cent abv £47.5816 pence
exc 4 per cent—ne 5.5 per cent abv £65.4222 pence
Wine or made wineper hectolitre per 75 cl bottle
exc 5.5 per cent—ne 15 per cent abv £154.37£1.16
exc 15 per cent—ne 22 per cent abv £205.82£1.54
Sparkling wine or sparkling made wine per hectolitreper 75 cl bottle
exc 5.5 per cent—less than 8.5 per cent abv £166.70£1.25
8.5 per cent and above—ne 15 per cent abv £220.54£1.65
Cider and Perryper hectolitre per pint
exc 1.2 per cent—ne 7.5 per cent abv £26.1315 pence
exc 7.5 per cent—less than 8.5 per cent abv £39.2122 pence
Sparkling cider and sparkling perry per hectolitreper 75 cl bottle
exc 5.5 per cent—less than 8.5 per cent £166.70£1.25
Beerper hectolitre per 1 per cent abv per pint at
5 per cent abv
£11.8934 pence

  Note:   exc=exceeding; ne=not exceeding.

PriceStrength Duty
Duty VAT
VAT Total
tax %
of price
Bitter (pint, in on-licensed premises)1.79 3.9% abv11.890.264 17.5%0.2670.530 29.6
Lager (pint, in on-licenses premises)1.97 4.1% abv11.890.277 17.5%0.2930.570 29.0
Whisky 70 cl (in retail outlet)11.72 40% abv19.565.477 17.5%1.7467.222 61.6
Table wine 75 cl (in retail outlet)3.16 11% abv154.371.158 17.5%0.4711.628 51.5
Cider (litre, retail outlet)1.74 7.5% abv26.130.261 17.5%0.2590.520 29.9

  * Duty rates for bitter and lager are per hectolitre per 1% abv, for whisky per litre of alcohol and for wine and cider per hectolitre.

  Note:   abv=alcohol by volume.

Annex C

Beer Spirits
Duty on a pint of beer at 5 per cent alcohol by volume (or 12.5 deg Plato) Duty on a 70 cl bottle of spirits at 40 per cent alcohol by volume
CountryPence Country£
Finland49pSweden 10.15
Ireland34pFinland 8.44
UK34pDenmark 6.18
Sweden30pUK 5.48
Denmark16pIreland 4.62
Belgium7pBelgium 2.78
Netherlands7pNetherlands 2.52
Austria6pFrance 2.43
Italy6pGermany 2.18
Greece5pLuxembourg 1.74
Portugal5pGreece 1.49
France4pPortugal 1.36
Germany3pAustria 1.22
Luxembourg3pSpain 1.15
Spain3pItaly 1.08

  Source:   European Commission's Excise Duty Tables (Printed March 2000).


  1.  Exchange rate: Financial Statistics (average rate for May 2000).

  2.  Beer at 5 per cent alcohol by volume equates to 12.5 deg. plato. (Average strength of beer in UK is 4 per cent, but on continent is estimated to be 5 per cent.)

  3.  Netherlands, Denmark and Portugal calculate beer duty by using degrees plato but within a banded system.

Annex D


  The Excise Duties (Personal Reliefs) Order 1992 allows purchases by individuals for their own personal consumption to bear tax in the country of origin. The Order lays down minimum indicative levels (MILs) to help distinguish between commercial consignments of alcohol and tobacco products, which bear UK rates of duty under the provisions of the Holding, Movement, Warehousing and REDS Regulations. The MILs for alcoholic drinks are:
Spirits10 litres
Fortified wine20 litres
Wine90 litres
Beer110 litres

91   Council Directives 92/83/EEC ("Structures Directive") and 92/84/EEC (the "Rates Directive") respectively. Back

92   The Queen v HM Treasury, Commissioners of Custom and Excise, The Attorney General-Ex Parte Shepherd Neame Limited. Queens Bench Division CO/3259/97 and Court of Appeal QBCOF 98/0394/4 FC3 98/6724/4. Back

93   This is based on the average price for a bottle of whisky in April 2000 of £11.72 which is calculated using specially collected ONS information on alcohol price movements. Back

94   Consumers' Demand and Excise Duty Receipts Equations for Alcohol, Tobacco, Petrol and DERV by Marcus J Chambers, University of Essex November 1998 (Revised August 1999)-Government Economic Service Working Paper No 138 (November 1999). Back

95   Own price elasticity of demand measures the responsiveness of demand for a particular product to changes in the price of that product. Thus in the case of spirits, a 1 per cent increase in price should result in a 1.4 per cent decline in demand. Back

96   ie quantities released for domestic consumption. Back

97   The Drink Pocket Book 2000. Back

98   As a percentage of market share (pure alcohol). Back

99   Of this total, a little over £2 million relates to detections made by IETs in Scotland. Back

100   The subject of alcohol and tobacco fraud and smuggling was included in the terms of reference for the Treasury Sub-Committee inquiry into Customs and Excise towards the end of 1999. As part of the inquiry the Sub-Committee requested a report on the implementation of each of the ATFR recommendations. A summary of progress, as at 31 November 1999, was produced and included in the minutes of evidence taken before the Committee on 3 November 1999. Back

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