Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Question Number 674-699)




  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 year—by volume—and 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 industry.
  (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 control?
  (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.

Mr Carmichael

  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.

Mr Lazarowicz

  679. Do I take it from what you have said that there will be situations where abstraction controls will not be required?
  (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.

Mr Weir

  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.

Mr Lazarowicz

  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 that—this forms the basis of our approach—we shall look at water abstraction on a case-by-case basis and that will take local needs into consideration.

Mr Lyons

  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.

Mr Carmichael

  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 and SEPA.

Mr Sarwar

  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.

Mr Weir

  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 in Europe.
  (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.

John Robertson

  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. [32]

  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 the case?
  (Mr Boateng) I think the jury is out on that one in terms of the arguments around elasticity.

Mr Duncan

  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 one—although I may have trouble with the spelling of Laphroaig—welcome.

  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 to do.

Ann McKechin

  694. Given that the Treasury has frozen the rates on spirits over the past four years, will that be a continuing trend?
  (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 time.

  Chairman: I believe all Members of the Committee wanted to ask that question.

Mr Weir

  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 Europe—my colleague Baroness Symons may make a wider remark around globalisation—our 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 constituency connections.


  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.

Mr Sarwar

  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 partners' jurisdictions.

John Robertson

  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 rates.

Mr Weir

  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

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