Examination of Witnesses (Question Number
WEDNESDAY 31 OCTOBER 2001
BOATENG MP, MR
BRANKIN MSP, MR
674. Good morning. Thank you all very much for
your attendance this morning before the Committee. We have taken
up an inquiry started by our predecessor Committee into the drinks
industry in Scotland, covering the whisky industry and the water
industry in particular. Perhaps at this point I can ask any Member
of the Committee to declare any interest he or she may have in
this regard. I am chair of the Scottish All-Party Scotch Whisky
Group and I declare that interest now. I thank the Ministers for
attending this morning. I give a particularly warm welcome to
Rhona Brankin. This is quite an historic occasion as this is the
first time that a Minister from the Scottish Parliament is attending
an inquiry with colleagues from Westminster. We thank you for
attending this morning. Perhaps I can ask the Ministers to start
with a brief statement outlining the responsibilities appertaining
to the inquiry, and then we can go on to the structured questions.
If you do not want to make a brief statement that is fine, but
if you have something that you would like to say, we are happy
for you to do that first.
(Mr Boateng) I am the Financial Secretary to the Treasury
and I have responsibility within the Treasury for Customs and
Excise. I also have a responsibility for productivity, competition
and enterprise. In both of those respects we particularly welcome
the decision of your Committee to revisit this topic. The Scotch
whisky industry is a major exporter. It makes an important contribution
to our balance of payments. Excise duty and VAT on alcohol contribute
some £11 billion to the Exchequer each year which obviously
makes an important contribution to schools, hospitals and a whole
range of vital spending programmes. Therefore, we are highly cognisant
of the importance of the industry and of our responsibility to
Customs and Excise to protect both the Exchequer and legitimate
business when they are under attack as they are from criminals
involved in smuggling and fraud. So for all those reasons, this
is a particularly welcome inquiry.
(Baroness Symons of Vernham Dean) I am the Minister
for International Trade and Investment. I have brought colleagues
with me who deal with the competition side of our relationship
with the industry. As you will know, the sponsoring department
is DEFRA, but the DTI and indeed British Trade International (BTI)
also have a very good relationship with the spirits sector, especially
on the trade side. We share a clear common purpose in promoting
competition and developing markets worldwide. Sometimes that is
through bilateral approaches, sometimes through Ministers and
sometimes with our posts on the ground, or, of course, through
the Commission. At other times, when appropriate, we do so under
the auspices of the World Trade Organisation. We think that we
have had a successful history in relation to this. As Paul Boateng
has said, it is very important to us in terms of employment and
in terms of our export performance overall. The Scotch Whisky
Association has just announced that exports to Asia, for example,
were up by one-third in the first half of the yearby volumeand
by up by 20 per cent in terms of value. The industry has regular
access to the DTI Ministers and, of course, to senior officials
as well as extensive day-to-day contact with officials on individual
cases. We believe that that dialogue is very important. We also
believe that the industry thinks it is important too. They have
made that very clear in the representations that they made to
my colleague, Patricia Hewitt, the Secretary of State at the DTI
in relation to the DTI reviews that are currently under way. On
the competition side, the Enterprise Bill planned for this parliamentary
session will make a significant change to competition law. If
the Committee would like to explore that further, my colleagues
on the competition side, Mr White and Mr Metcalfe, will be happy
to deal with those questions. On the trade side, we are coming
up to the launch of the new trade round, which we hope will be
in about 10 days to two weeks' time in Qatar. We believe that
the industry would benefit significantly from the launch of the
round. Clearly, the negotiations will be particularly significant
in relation to the agriculture negotiations about which there
has been a certain amount of public comment. Those negotiations
are already under way as a result of what happened in the Uruguay
Round, when a round was last launched. Perhaps there are some
other ways in which the new trade round is very significant to
the industry, such as further reductions in tariffs. The elimination
of non-tariff barriers is also an important point. The enhanced
protection for intellectual property rights, of which I am sure
the Committee is aware, is a big issue for the industry and finally
there are services, like agriculture, on which negotiations began
a little while ago. We also believe that the industry should benefit
significantly from the general boost that the launch of a new
trade round will give to worldwide trade. I should make reference
to the importance that the Government attach to the launch of
the round, not only because of the liberalisation of trade in
general, but particularly after the appalling events of 11th September.
We believe that international trade needs this significant boost
that we hope the launch of a new trade round will lend to all
of our exports effort, which of course includes the Scotch whisky
(Ms Brankin) Thank you for your welcome. I am delighted
to be here. I am the Deputy Minister for Environment and Rural
Development in the Scottish Executive. I thank you for your invitation
to me to give evidence to your inquiry. As you are aware, primarily
I am here to talk about the requirements of the Water Framework
Directive. This opportunity has presented itself and it allows
me to reiterate the Executive's support for the drinks industry
in Scotland and the recognition of its value and importance to
the Scottish economy. I should point out that the responsibility
for the drinks industry within the Scottish Executive lies with
Wendy Alexander and Alistair Morrison who has particular responsibility
for the Scotch whisky industry. The industry's prosperity is dependent
on the continued availability and abundance of excellent quality
water. That is also crucial to its image across the world and
the industry has committed itself to protecting the natural environment
from which it draws its raw material. We have pledged to support
the Scottish manufacturers' policies where devolved matters have
an effect on competitiveness and we shall take steps to ensure
that in meeting the requirements of the legislation that the regulatory
burden on the businesses is kept to a minimum. The EC Water Framework
Directive came into force on 22 December last year. It sets out
a new approach to protecting and improving the water environment
across the EU. The directive gives us a framework to work on,
but we shall have to fill in the details. The first step in the
implementation will be the transposition of the directive's provisions
into Scottish law. That will be done through the Water Environment
and Water Services Bill that we plan to introduce to the Scottish
Parliament next year. We know that it is important to engage all
the interested parties, including the drinks industry, as early
as possible in implementing the directive. That is why we are
striving to involve them at every stage. We believe that, by working
pro-actively, we shall be able to implement the directive in a
way that is best suited to the Scottish circumstances, so that
we can balance the needs of those who depend upon water for prosperity.
It is for that reason that in June we published a consultation
paper outlining the proposals. We have had responses to that and
a conference was held in September with representatives of the
industry attending. The week after that event I had an opportunity
to meet with representatives of the whisky industry, which produced
an opportunity to discuss their concerns. Also my officials have
met with the industry and will continue to do so. I shall finish
there, but I am happy to answer any more detailed questions on
the environmental impact.
675. I should say that today's evidence will
go onto the Internet as soon as possible after this session. Rhona
Brankin, I shall ask you some questions first. If, after giving
your part of the evidence, you would like to leave because you
have to return to the Scottish Parliament, please feel free to
do so. You have given us some indication of the view of the Scottish
Executive on the Water Framework Directive. What does the Executive
think of the effectiveness of the licensing system for abstraction
currently operating in England and Wales? Do you consider that
the system there produces tangible environmental benefits?
(Ms Brankin) Obviously, there is a system of abstraction
control for England and Wales and our officials work closely with
officials in England and Wales. We have been looking at the matter
closely in terms of drawing up our own plans to develop abstraction
controls in Scotland. We are at an early stage in that, and we
have to be able to work in tandem with colleagues in England and
Wales. One of the reasons for that is because we share river basin
areas and we have to draw up river basin management plans for
rivers such as the Solway and the Tweed. So we shall be working
closely together, building on the experience of England and Wales
and looking at areas of common interest.
676. Mr Kellet, would you like to add anything?
(Mr Kellet) We have good relations. I suppose we learn
lessons from the system south of the border, as appropriate. We
deal with the situation in consultation with the industry as well
as with other bodies.
677. Does the Scottish Executive believe that
it is necessary for Scotland to introduce a system of abstraction
controls? Has the consultation process undertaken by the Scottish
Executive shown any clear consensus yet on the need for abstraction
(Ms Brankin) There is no doubt that the Water Framework
Directive requires us to introduce controls over water abstraction
in Scotland. It requires us to deal with all human impacts on
the water environment. Although we have what many would say is
an over-abundance of water in Scotland, we believe that we cannot
afford to be complacent. Over-abstraction of water can cause damage.
There is no doubt that it causes some environmental problems in
some parts of Scotland at certain times of the year. We cannot
afford to be complacent, so we need to build up an overall picture
of the impact.
678. When drawing up your abstraction control
policy and your guidelines, it must be borne in mind that the
Scotch whisky industry, particularly in the more remote parts,
will have a different need from other businesses and other commercial
organisations in the business of abstraction in other parts of
the country. What assurances can you give us that what will come
out at the end of the day will not be a "one size fits all"
policy, but that there will be sufficient flexibility incorporated
within it to recognise the different needs in the different areas?
(Ms Brankin) Yes. I recognise the importance of the
Scotch whisky industry, certainly in many areas which have an
environment with specific needs. We are aware of the need to ensure
that although we implement the directive on a Scottish-wide basis,
it will be implemented in a way that meets the local needs of
that environment. Indeed, where there is no need for abstraction
controls that is fine. Essentially, we need to be able to build
up a picture and to take it from there and then look at the controls
that will be necessary.
679. Do I take it from what you have said that
there will be situations where abstraction controls will not be
(Ms Brankin) It is difficult to give an absolute answer
to that. It may affect only certain industries. They will be required
to be licensed, depending on the amount of water that they use.
We shall have to look specifically at each individual case in
order to determine what sort of controls will be necessary, but
it is very much a case of looking at each individual case, looking
at potential impacts and making a decision in full consultation
with the industry.
680. Has any thought been given to the cost
to the industry of abstraction controls? Many businesses, including
whisky have suffered a great deal of cost in implementing the
Waste Water Directive. Has any thought been given to the cost
of implementing this directive?
(Ms Brankin) Currently there is an initiative between
SEPA and the Scotch whisky industry that is looking at potential
impacts. I have had discussions with the Scotch whisky industry
and they are also very focussed on the need for their industry
to represent what is best in terms of clean use of the environment.
Certainly, they accept that it is in their interest as well. There
is a continuing dialogue with the industry and recognition on
the part of the industry and ourselves that there has to be a
degree of meeting of minds in this. It is important for the industry
to rely on a clean environment. We are aware of that and we are
having discussions, through SEPA, with the industry.
681. Regardless of the form in which abstraction
regimes are introduced, do you consider that there is any merit
in the introduction of a register of water users?
(Ms Brankin) We need to be able to build up a comprehensive
picture of the use of water in Scotland. It would be useful to
have a register. Only when we have a full picture of water use,
will we be able to make plans for the management of that resource.
682. The Committee understands that there are
local problems with abstraction? Does that justify a blanket approach?
(Ms Brankin) Although we are required to implement
the directive in Scotland, we shall be taking very much a case-by-case
approach. We have said thatthis forms the basis of our
approachwe shall look at water abstraction on a case-by-case
basis and that will take local needs into consideration.
683. On the question of the water users' register,
to what extent is registration available now, through the local
authorities or SEPA or anything else?
(Ms Brankin) At the moment there is no comprehensive
system. That is why we would find this useful.
684. At the risk of being presumptuous, and
before I move the discussion on, perhaps I can express the hope
that this is not the first and last exchange between Ministers
here and in the Scottish Parliament. In the past there has been
some reluctance for some people here to make the journey north.
I hope that the example that you have set, and the precedent you
have made, will not be lost on some of your colleagues in Westminster.
Broadening the discussion, how do you see the relationship running
between the whisky industry and the Scottish Environmental Protection
Agency, as it currently exists?
(Ms Brankin) I think the relationship is very positive
just now, and I am encouraged by the positive dialogue between
SEPA and the Scotch whisky industry. A joint discussion is taking
place and we are looking at that. I am encouraged and I think
that the situation at this stage is positive. We want to seek
to reduce some of the fear of the unknown and the worry that there
may be some sort of blanket imposition of abstraction controls.
As I have explained, that will not happen.
685. I am encouraged by what you are saying.
I think there was a lot of unnecessary conflict, particularly
in relation to the Waste Water Directive. One particular example
that springs to mind was the regulations that were imposed on
Islay in relation to waste water disposal in relation to the production
of pot ales. That waste was taken from Lagavulin at the south
end of the island to the north end of the island for disposal.
Most of the time there was a good strong tide running and it would
be back at the south end of the island before the lorries were.
Can we have some assurance that there will be a more sensitive
approach taken by SEPA in relation to whatever comes from the
water treatment regulations and that we have learned from the
mistakes of the past?
(Ms Brankin) Yes, absolutely.
Chairman: The predecessor Committee visited
Islay. I and other members of this Committee were Members of that
Committee. There was disquiet that it had cost the industry £650,000
to implement measures that none of us could see the point of.
We would hope that there was later dialogue between the industry
686. I would like to highlight that point. We
took evidence from representatives of the industry that there
was unease and unnecessary burden placed on the industry. That
did not help them to compete in the industry and they were very
uncomfortable about it. We do not know what the relationship was,
but we felt that SEPA had treated the industry in Scotland unfavourably.
(Ms Brankin) I take that point. I believe that the
relationship is a lot better. Certainly I am working hard to ensure
that we work together in partnership.
687. Does the Scottish Executive have any plans
to transpose into Scottish law the full provisions of EC Directive
96/70, which would require stricter control on what might be labelled
as spring water? I think the Minister will be aware of the several
companies in Scotland, particularly in rural areas, for whom this
is an important matter. Stricter regulations may be of benefit
in dealing with the competition. There is already a stricter regime
(Ms Brankin) As you may know, we are preparing the
regulations in the form of the Draft Spring Water and Bottled
Drinking Water (Amendment) (Scotland) Regulations 2001. Earlier
this year, in March, we issued a consultation document and the
Executive is currently looking at the results of that consultation.
The intention is to publish the document and to go out to another
round of consultation on that. In Scotland, the responsibility
for implementing the directive in respect of bottled water rests
with the Food Standards Agency. These regulations were put out
earlier this year, and there will be a further short consultation
on these regulations.
Chairman: I think that SEPA have come back to
us on this point. Hopefully, the relationship with the industry
is now improving. Thank you very much. If there is anything that
you feel you would like to add, or any other point you want to
raise during the proceedings, please feel free to do so.
688. What is the reason for the relatively high
rates of excise duty on alcohol imposed by the UK Government compared
to other countries within the EU? I point particularly to Germany
in relation to beer. We have something like ten-and-a-half times
the excise duty, and when we look at Spain in relation to spirits,
our duty is five times higher.
(Mr Boateng) Before responding to the question perhaps
I can introduce my colleague who is Head of Excise (Social Regimes)
at HM Customs and Excise, who is assisting me this morning. I
shall respond to the question by saying that traditionally in
the United Kingdom, we have had relatively higher rates of taxation
on alcohol in comparison with our European partners. I think we
are something like fourth in the list, after Sweden, Finland and
Denmark. That has been the tradition in the United Kingdom over
many years. It is worth pointing out that each sovereign state
develops its fiscal regimes in accordance with its traditions.
Understandably you give the example of Germany, but that country
also taxes coffee, whereas we do not. Each country, over the years,
develops its own approach to taxation. We have some of the lowest
rates of personal taxation across the EU; one of the lowest overall
burdens of taxation across the EU, but traditionally there has
been a differential between ourselves and our EU partners on the
taxation of alcohol.
689. I accept that except for the fact that
we seem to tax whisky which is our own product a lot higher than
other countries. How does that weigh up with what you said about
beer in Germany?
(Mr Boateng) In relation to the discussions that we
have had within the EU on this issue, we have urged the increase
in the minimum rates for wine and beer and we have urged the reduction
of the minimum rates in relation to whisky precisely in order
to encourage and to support our export industry. However, the
traditional pattern of our own taxation as between whisky and
beer and wine remains. Perhaps I can give you an example of the
consequences if we were to reduce our rates to those that exist
in France. It would be the equivalent of 2p in the pound on income
tax. That would be the consequence if we were to adopt the French
model. That would have real implications for us all on both sides
of the border. 
690. You are talking about the rate of duty
on spirits in the UK as compared with France?
(Mr Boateng) No, across the board.
691. Would we sell more whisky if that were
(Mr Boateng) I think the jury is out on that one in
terms of the arguments around elasticity.
692. You may be aware that Douglas Alexander,
the Trade Minister, is currently in India, having discussions
with the commerce minister in India. He made some very interesting
observations in that India has some punitive taxes on whisky.
I commend him for tackling the problem. One of his comments was
that he will be pressing the case for lowering the tax on whisky.
What are your observations on the juxtaposition between the external
approach of the Trade Minister and whether that view is related
to inside the Treasury?
(Mr Boateng) Without commenting specifically on the
Minister's remarks in relation to India, the concern is specifically
about a tax that is discriminatory and designed to inhibit trade.
That is not something that any Minister, on either side of the
border, would ever be prepared to countenance. It is worth pointing
out that over the past four Budgets there has been a freeze on
spirits duty. That has narrowed the differential. Without those
freezes, a bottle of spirits would be 64p more expensive than
it is today. If you take a 20-year period, whisky is cheaper today
as against wine and beer than it was 20 years ago. So the trend
is one that the industry and whisky drinkers, of whom I confess
to be onealthough I may have trouble with the spelling
693. I am sure that the Chairman will welcome
your declaration of interest in this subject! Does the Treasury
accept that given that we have had four years of no increase,
that that is a reflection of the view that whisky is over-taxed
in the UK?
(Mr Boateng) It is a reflection of the Chancellor's
budget decisions over four successive years. The Chancellor has
to make decisions in relation to levels and to rates of taxation
and duty in the light of all the circumstances at each budget.
That is what the Chancellor does and that is what he will continue
694. Given that the Treasury has frozen the
rates on spirits over the past four years, will that be a continuing
(Mr Boateng) I would refer Ms McKechin to the remark
that I have just made in relation to the Chancellor's judgment
over four successive years. He will make a judgment around budget
Chairman: I believe all Members of the Committee
wanted to ask that question.
695. On the Qatar round and the liberalisation
of trade, does the Minister see a move towards the harmonisation
of duties, particularly within Europe?
(Mr Boateng) If I can limit myself to the harmonisation
of duties within Europemy colleague Baroness Symons may
make a wider remark around globalisationour policy has
been and remains to oppose consistently harmonisation. We do that
for the very good reason that we believe it is important to maintain
the Chancellor's flexibility in this area to determine what best
suits the interests of the economy at any given time. That is
why, for instance, we have not favoured unitary taxation over
the years, because it does not permit, in our view, sufficiently
individual responses to changing circumstances. That is not to
say that we have not urged on our European partners the changes
that we believe will be beneficial to our national interest and
to the benefit of the drinks industry in relation to minimum rates,
where we believe it is proper to have a European-wide policy and
where we take a very robust view, informed by the representations
of the industry and indeed representations from members whose
knowledge and understanding of that industry arises from their
696. Minister, you said that the system is mainly
traditional. Has it become a bit hidebound and perhaps it is time
to revisit our traditions and to work on them?
(Mr Boateng) You may say that I would say this, but
the view that we take is that it is always important to ensure
that the Chancellor maintains the freedom of action and has the
flexibility that is necessary in terms of rates and levels of
taxation across the piece to make the necessary determination
as to where the national interest lies. Our approach traditionally
has been as I have described. That is the nature of these islands'
history. I am bound to say that it has served us well over the
years in terms of revenue source. Let us be clear about that.
It is part of a pattern of taxation that we believe is in the
interests of all our peoples.
697. Minister, as you are aware, excise rates
are considerably higher in the UK than in most other European
countries. No one expects the reduction of those rates and harmonisation
overnight, but I believe that we need a long-term strategy in
which, if we have a reduction in excise duty, we can recover the
revenue lost through increases in sales and eliminating smuggling.
What are the revenue implications for the UK economy of the wide
margin between excise duty in the UK and those in most other European
countries? Is any review of the situation proposed?
(Mr Boateng) Obviously, we have an interest and a
determination to tackle smuggling. In relation to smuggling it
is interesting that there is questionable evidence as to whether
or not the differential rates actually impact on levels of smuggling
as much as is currently thought. Much of the alcohol which is
the subject of illegal trading has never been the subject of duty
anyway, so it is not a question of simple cross-border or cross-Channel
smuggling, which of itself is an issue and which we devote a not
inconsiderable amount of resources to combatting and with some
success. It is not just a question of people buying over there,
where rates are lower, and reselling here. It is an illegal activity
that undermines legitimate business and an activity that is centred
on alcohol that has never paid any tax anywhere. So we do not
believe that a response to smuggling ought to be to reduce our
own levels of taxation. We believe it ought to be, and it has
been, a re-doubling of our efforts in order to combat smuggling.
The figures speak for themselves. That is why we have put out
an extra 170 customs officers to tackle cross-Channel smuggling
and why we have placed the emphasis that we have on combatting
spirits fraud. We believe that that is the proper approach rather
than reducing our rates. Nevertheless, I repeat that we recognise
the concerns around competition that the industry quite understandably
has in terms of the way that it is taxed in our neighbours' and
698. Later we shall ask about the cross-border
smuggling, but from what you have said to my colleague, the answer
to the question is that you are not going to do anything. I am
somewhat surprised, particularly as we are trying to be part of
the European Community and trying to bring everybody on board
with us. Is our attitude as a Government to taxation that it is
right and that everybody should come up to our levels? Should
we not meet them somewhere in the middle?
(Mr Boateng) Our attitude as a Government vis-a-vis
our European Union partners in relation to the drinks industry
is to protect our interests and the interests of the industry.
We believe that that is best served by consistently arguing the
case for minimum rates that reduce the disparity and the disadvantage
that our spirits industry particularly suffers abroad in terms
of the differential between beer, wine and spirits. That is why
we argued against the zero rate for wine and why we were concerned
that the EU's most recent reviews in this area have come to nothing
in terms of minimum rates. We are looking forward to the outcome
of the 2000 review, because we believe that that will assist us
in our objective which is to tackle this issue through minimum
699. Earlier the Minister said that he did not
think that the differential rates of duty were at the root of
the smuggling problem. I was slightly surprised by that, given
the amount that it is alleged is smuggled into the UK from Europe.
I would have thought that it would have originated from some sort
of commercial venture where duty was paid on the production. Does
that not affect the lower duty at that stage?
(Mr Boateng) I do not believe that I put it as baldly
as that. I suggest that the case is that it is possible to exaggerate
the impact of the differentials between ourselves and France on
this issue because of the way in which spirit fraud, as such,
is grounded in spirit that has not paid duty anywhere. Undoubtedly,
in terms of cross-Channel smuggling it features. If you can load
up a white van in Calais and get away with bringing in large quantities
of spirits, tobacco or other goods where there is a tax differential
and then flog it on the other side, that is a factor that determines
whether or not you are prepared to take the risk. The message
that we would send to those who seek to evade duty in that way,
bringing in goods that clearly are not for personal use and exceeding
the EU guidelines, is that we are on your case and we are strengthening
our customs capacity to respond. I understand that you will be
asking more questions about smuggling later, but I do not want
anyone, for one moment, to under-estimate the extent to which
the links with organised crime of smuggling represent a threat
to us all. People who are prepared to smuggle alcohol and tobacco,
in my experience, not least as a criminal justice Minister, will
also be prepared to smuggle drugs and will be prepared to use
not inconsiderable violence in order to further their criminal
ends. We do not intend to allow them to get away with it.
32 Note by Witness: The objective is to see
the differential between the minimum rate of spirits, and that
for beer and wine, reduced. Back