Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Question Number 700-719)



  700. I appreciate what the Minister says, but I am still curious about spirits that pay no duty anywhere. Surely such large consignments cannot have failed to pay any duty whatsoever.
  (Mr Boateng) I shall defer, if I may, to Mr Summersgill, who has immense operational experience of this issue.
  (Mr Summersgill) In respect of spirits, the vast majority that are brought into the United Kingdom are what we call "inward diversion fraud". Perhaps I can give the Committee the background. When the European manufacturers produce spirits they are allowed to sell them in "duty suspension" and they will move around the European union in "duty suspension". Most of the smuggled spirits coming into the country, come in, effectively, with false documentation, suggesting that it is a legitimate load of goods moving in "duty suspension", so it will have borne no duty in any of the member states. The vast majority of the problem that we have with spirits smuggling is that the spirits have borne no duty at all. They have been obtained on the pretext that they are going to legitimate sources in the UK. The position is slightly different with beer and wine. Much more of that is the subject of cross-Channel smuggling, so that will have been obtained in supermarkets in Calais or elsewhere in France or the near-Continent. It will have borne near-Continental levels of duty and then it will be smuggled in, largely through what we call the "white van trade".

  701. I accept that and I thank you for that explanation, but I have one small point. If you are talking about Scotch whisky coming back in, being smuggled in, how can that be "duty suspended" if it originated in the UK, went to France, say, and is coming back in again? Surely, it would be obvious that it would not have paid duty, in those circumstances.
  (Mr Summersgill) It would have been exported in "duty suspension" to, say, a warehouse in France. It may have been obtained falsely from that warehouse in France, or it may have passed through several hands in France in "duty suspension". Then it would be re-imported into the UK with documents that say it is going wherever in the UK. Obviously, if we find shipments of Scotch whisky coming into the UK we are a little more suspicious, but it is not a crime to import Scotch whisky into the UK. It is a perfectly legitimate practice.


  702. Do you have any idea what proportion of smuggling comes across the Channel and what proportion is smuggled without duty being paid at all?
  (Mr Summersgill) The vast majority of spirits are smuggled into this country without any duty being paid at all. That is costing about £500 million according to the latest figures published by the NAO. When beer and wine come across the Channel again some duty will have been borne and that is costing us about £300 million.

Mr Sarwar

  703. I know that we shall come to the smuggling issue later, but you will know that there are many people who go to Europe and bring back large quantities of cigarettes and alcohol, including spirits, because of the difference in price. It has been said that we can recover that revenue from other places. Is the Government considering any policy to narrow the gap on excise duties, or do you just think that that gap will exist for ever and that is that?
  (Mr Boateng) The policy of the British Government is to ensure that the Chancellor of the Exchequer retains the flexibility in relation to levels or rates of taxation and duty to enable him to create in these islands the most favourable conditions for enterprise, for competition, for productivity and for the levels of public spending and investment that are required to meet the needs of our fellow citizens. That is our policy. If you examine the revenue benefit, over the years, towards our approach to duty, whether excise duty or VAT, you will see the substantial benefits that that policy has brought. Eleven billion pounds plus is a very great deal of money. It behoves those who suggest that that money be foregone to suggest what programmes should be cut in order to reflect that, or how the Chancellor ought to raise the gap that would open up in the nation's finances as a result. The Chancellor has to have the discretion to make his judgment. He makes that judgment, of course, on the basis of representations that are made to him very often around this time. That is fair enough. However, we are not prepared to countenance the fettering of the Chancellor's discretion in this area.

Mr Lyons

  704. Going back to the "duty suspended" spirits, what are we saying to the manufacturers in terms of their responsibilities to look after the situation?
  (Mr Summersgill) The system for moving alcohol around the EU is a harmonised system. It is a common system that applies to all member states. When a Scotch whisky distiller exports some whisky, say, to France, either he or somebody else is required to put up a guarantee for the duty involved, effectively. If the consignment is lost or stolen, then a liability to the duty arises. That is a very strong incentive to the person who dispatches the goods to ensure that they use proper hauliers, that they ensure that the customer whom they are supplying is a legitimate person and they are also required to check whether it is going into "duty suspension" and that it is going to a properly authorised warehouse.
  (Mr Boateng) I am bound to say that the overwhelming majority of people engaged in the industry in all its aspects behave responsibly and diligently. It is important to get that on the record. From time to time there will be cases where there is less than appropriate diligence exercised. When that comes to light, that will be a matter both for advice, where appropriate, and prosecution, where appropriate. In the main, the overwhelming majority of people engaged in the industry behave responsibly, not least because they recognise that, at the end of the day, smuggling undermines legitimate business. It is a crime; it is not in anyone's interest and the overwhelming majority of people engaging in industry at every level are honest, law abiding people who recognise their civic responsibility in this area.

  Mr Sarwar: The SWA drew attention to the complexities involved with moving bonded products. It described the system as "creaking". Basically, a drinks exporter has, within two months, to receive from a destination authorised warehouse elsewhere in the EU an administrative accompanying document or AAD authenticating receipt. The non-appearance of the AAD renders the exporter liable for duty which could amount to £100,000 per container of whisky. The difficulty faced by whisky producers in identifying authorised warehouses in a system which is still paper bound and only in the process of being computerised has caused the SWA to argue that a defence of due diligence should be admissible when irregularities arise. What is the government's view of a plea of due diligence in circumstances when consignments of spirits have been diverted or lost but where exporters have demonstrably acted properly and in good faith?


  705. That is £100,000 per container.
  (Mr Boateng) Yes, £100,000 for a container of spirits and £20,000 in relation to beer at United Kingdom rates. My response to what is an important question is that European law provides exclusions to liability for losses but these do not include circumstances where a trader claims to have exercised "due diligence". For us to institute a domestic policy where due diligence was perceived in this way and was accepted as a defence for duty would be contrary to the Holding and Movements Directive. Obviously, that is therefore a factor that would preclude us going down that path but what Customs have done is to enable from 28 September of this year warehouse keepers to limit their liability when they cannot control the ultimate delivery of the load. In these cases, they can now ask the transporter or the owner of the goods to provide the guarantee. Therefore, the person who provides the guarantee also assumes responsibility for the duty on the load. That element of flexibility has been introduced but obviously where the warehouse keeper is also the owner of the goods the options for requiring someone else to assume liability through providing the guarantee are more limited. In that case, the possibility of a duty charge does actually address the point that was raised earlier on about making sure that people stay on the straight and narrow because it is an incentive to the warehouse keepers to be vigilant about fulfilling their responsibilities because there is a penalty to be paid if not. Mr Morrison in his oral evidence recognised that.

Ann McKechin

  706. As you are aware the taxation on spirits is considerably higher than that on wine and beer. Can you tell us what the government's justification is for having such a current system of tax difference where spirits are more severely taxed? Would you accept that the system does discriminate against spirits and the spirits industry as opposed to the beer industry, for example?
  (Mr Boateng) Undoubtedly, for the historic reasons that I have outlined, there is an additional burden of taxation on spirits as opposed to wine and beer. That is the case and that is the pattern of taxation that has emerged over the years. The upside—and I think the freeze indicates this ". . . you asked a leading question about the freeze which I declined to get drawn into . . ." is that the system we have, which is one that rejects the concept of unitary taxation, does allow the Chancellor to respond to individual concerns within the industry about changing circumstances within the different sections of the alcoholic drinks industry. That flexibility is there and maintained and, as I have indicated and as I hope the history of the Chancellor's approach to this subject over the last four years has indicated, he does clearly take very seriously, in arriving at his judgment as to what the best interests of the economy are, representations that are made to him.

Mr Carmichael

  707. Can you understand the frustration that exists in the Scotch whisky industry in particular when we hear you talk about historic reasons which, to my mind, is just another way of saying, "That is the way because that is the way it always has been and we are not inclined to change it". There is a clear contradiction in a government policy that says, "We will promote our own indigenous industries and punish the Scotch whisky industry more severely as compared perhaps with the French wine industry". Having said that, however, there has been a great deal of what you have said this morning that has gladdened my heart. I am delighted to hear that the Treasury recognises the immense contribution that the drinks industry and the Scotch whisky industry in particular makes to the wider Treasury pot. In that context, can you understand that the Scotch whisky industry in particular is one which is very sensitive to trends in the wider economy? What you tend to find is that, when the economy goes into a downturn - we do not have that any more because we do not have boom and bust - the Scotch whisky industry is one of the first to pull in its horns. That can have a very severe impact on some of the most vulnerable areas in what are referred to as peripheral parts of this country or these islands, as you call them. A lot of them are islands, funnily enough. The general plea I am making is that everything is fine at the moment when the economy is running fairly well but, come the downturn, which will inevitably come at some stage, can we have some assurance that the particular needs of the Scotch whisky industry and the communities which depend on it will not just be ignored in amongst the wider picture?
  (Mr Boateng) My reference to these islands is to the British Isles but I do recognise that, as you say, this is an industry that is rooted in the rural economy as much as it is in the urban one. What you describe as the peripheral areas - many of them happen to be islands - are very much affected by the state of the industry. I can assure you that the Chancellor takes very, very seriously indeed - these are matters for him obviously, the level and rate of taxation and duty - the representations that are made to him by the industry and those with the concerns and best interests of the industry close to their heart. Of course those parts of the British Isles which are most affected by the state of the industry are very important and integral to the rest of the country as a whole. They are not regarded as peripheral to his considerations, both in terms of the employment they generate but also in terms of the environmental impact of their operations and their contribution to our overseas areas which Baroness Symons is much more qualified than I to talk about. In response to your earlier challenge, this particular Minister is only too happy to respond to any invitation to go north, as you put it. Indeed, it would be odd if it were not the case, given that this particular Minister's grandfather gloried in the name of Robert Wallis Burns McCombie. You can tell from that that, although his father was a Scot, he was born in London. I would be only too happy to come and see for myself and to respond to any invitation that you or others might extend.

  708. It is not for me to invite people to the Scottish Parliament. I am sure others can do that.
  (Mr Boateng) I was not just thinking of the Parliament.


  709. The key question is the discrimination of spirits. Is there a discrimination in spirits? I am looking for a yes or no answer here.
  (Mr Boateng) Self evidently, a greater burden is borne by spirits than by wine and beer.

  710. How does the government view the operation of the EU minimum rates system and does the government agree with the assessment made by its predecessors in 1995 that the EU minimum rates system discriminates against spirits and is a barrier to free trade in Europe? What changes, if any, would you like to see introduced?
  (Mr Boateng) I would like to see the review delivered as quickly as possible and I am concerned - I have to share this as the Committee has asked me specifically - that the 1996 and 1998 reviews did not materialise at all. That is a matter of concern. Of course, we accept that Member States are free to set duty rates at levels which are appropriate to their own particular circumstances, subject only to the unanimously agreed minimum rates, but we do actually want to be in a position to see some changes in terms of the way in which and the level at which those rates are set, particularly in relation to wine but also in relation to beer. We want to see the minimum rates for spirits reduced. That is our objective. We have responded to the questionnaire that was issued by the consultancy firm, Customs Associates, to help inform the process. That set out our national objectives as much as I have shared them with you and, amongst other things, the revenue losses resulting from the current disparities between Member States' rates. It goes back to the earlier point about cross-border shopping and smuggling. The trade associations, again through their European bodies, also had some input into this and we hope for an early publication of the outcome of the review, whilst understanding that that questionnaire and the Customs Associates report was but one factor in the Commission's final report, but we will be making strongly to the Commission the points that I have made to you, whilst recognising that fiscal sovereignty is important. It is very, very important, as I know this Committee will appreciate, to our own national interests, but it does have to be underpinned by sensible and realistic minimum rates and, we believe, the abolition of the zero rate for wine.

Mr Lazarowicz

  711. I am glad that you made reference to the absence of the reviews over the last three occasions effectively. I am sure you would agree that the situation has not changed since 1992, let alone 1996. Can you tell the Committee what representations the government has been making in the past to try and get the review carried out, because it is now a serious issue for the industry and we are concerned about that. I wonder if you could tell us what the government has been doing about it.
  (Mr Boateng) At official level, certainly, [33]representations have been made and I would be happy to provide a memorandum to the Committee that outlines the nature of those representations, but perhaps more significantly one of the messages I get, amongst others, from this Committee is that you would like, I suspect, ministers to be involved in making those representations. I will write to the relevant Commissioner.

  Mr Lazarowicz: I would be happy if you would take steps to do that.

Mr Lyons

  712. Can I come to the question of the Roques Report and get your response? To what extent will the implementation of recommendations contained in the Roques Report properly equip the government to deal with the question of smuggling and fraud involving alcoholic drinks?
  (Mr Boateng) We obviously take the Roques Report very seriously as a responsible government would do. 37 of the 65 recommendations relate to management, culture and governance of the department. Richard Broadbent is this afternoon giving evidence to the Public Accounts Committee on this very point. The majority of the work on those management, culture and governance issues has been completed or it very soon will be in terms of the restructuring of the board. That has addressed a number of the concerns outlined in the Roques Report. The remaining 28 of the recommendations relate to the need to strengthen the EU-wide system for holding and moving goods in duty suspension. The key outstanding issue here is recommendation 27 on fiscal marking and I would be interested to know your own views on this because, as you know, there are differing views within the industry. Roques came to one view, rather in support of fiscal marking. There are concerns within the industry, understandable concerns from the industry's perspective, about significant compliance cost implications there. Before we were to come to any conclusion - and we have not come to a conclusion about that recommendation - we would want to be in a position to take very careful cognizance of the views of the industry to go forward with a process of consultation that has already begun informally in terms of soundings, but we would want to strengthen and take forward consultation on that particular issue.

John Robertson

  713. To come back to combating smuggling and fraud and cross-Channel shopping, what future action is planned to stop it?
  (Mr Boateng) This year, we have 150 detection staff deployed in Scotland itself. These are multi-functional, frontier and inland anti-smuggling officers who target excise smuggling of tobacco, alcohol and oils as well as prohibited and restricted goods, drugs, fire arms and child pornography. They are based in strategic locations across Scotland and deployed flexibly according to risk and the intelligence we receive. This represents an increase in 34 staff over last year and it has been achieved through the redeployment from lower priority work of other non-law enforcement resources. In addition to these detection staff, we have a national strike force. Teams are deployed alongside local staff. They blitz in Scotland and have done so on five occasions over the last 12 months. Let me give you an example of the sort of thing that they are up against. Ice cream vans used as a source of supply of contraband. It did come as a bit of a shock to me. I have clearly led a more sheltered life in north west London. The reality was very ugly on the ground, as many of you will know. Indeed, in the course of one particular raid one of our officials - this is what Customs officers are up against - sustained very unpleasant injuries. These are front line staff who do a very good job in very difficult circumstances on occasion. It is my belief that we owe them a debt of gratitude. We are taking it very seriously and much of it is, as you will appreciate, intelligence led. Very often in the public mind there is not necessarily a sufficient appreciation of the extent to which intelligence plays a part in this area. We have 68 intelligence workers deployed in Scotland alone and they are part of a network that goes right the way across these islands.

  714. Why have we been so slow in reacting to this? It is not this government but the previous government that has been so slow.
  (Mr Boateng) The facts speak for themselves in the sense that we reversed a decline in numbers of Customs officers that did occur under the last government. You would want to ask them why they came to the decisions they did come to but we have come to the decisions that we have based on our judgment as to where our priorities ought to lie and this is where they do lie.

Mr Weir

  715. From your knowledge of the structure and those involved in this illegal trade, do you think the Proceeds of Crime Bill should incorporate more powers to attack this particular trade?
  (Mr Boateng) We in the Treasury are obviously very supportive of the Proceeds of Crime Bill. I was fortunate enough to have served in the Home Office at the time of its genesis and I know the significance that successive Home Secretaries and Police and Criminal Justice Ministers have attached to this piece of legislation. It will make a real difference. I am able to share with you—although I would urge the Committee, were you so minded, to visit some of our front line operations and you will see for yourself- the genuinely multi-agency approach to the tracing of the money streams. There is a great deal to be gained in terms of detection and law enforcement from following the money. We and our law enforcement agencies, Customs and Excise, and also with other partners across government, the Department of Works and the Department of Pensions and Social Security, work together in order to trace the money streams. It works. We have made some real gains as a result of it but again it is very often intelligence led and it is very skilled work that utilises a range of skills and professional expertise.

Mr Sarwar

  716. I appreciate that the government has recruited more officers to deal with this problem. It is my experience that smuggling has reduced considerably since this government has taken over but there is one issue that warehouse owners always raise with me and that is that there are people involved in this illegal trade, who set up their own companies. They issue the proper receipts to shopkeepers, to warehouses, and the people who buy these goods buy them in good faith. Then Customs go and seize those products. Is there anything that can be done to have something on the label somewhere, "This is just for export" or even a different coloured bottle? That could make a tremendous difference because then people will know that they are selling illegal goods in the shop or in their warehouse if there is some form of distinction for the product where we can assess it is for the export market.
  (Mr Boateng) These are issues that your Committee will wish to wrestle with and to consider no doubt in the course of your deliberations. It is undoubtedly true, in relation to tobacco, that fiscal marking has helped enormously. I have met people in precisely the situation that you have described who have welcomed fiscal marking in tobacco because it gave them that sense of confidence and assurance that they were not unknowingly trading in illicit goods. It helped us target those - this is a London example - in the Caledonian Road who were openly selling cigarettes. Now of course that, as a result of fiscal marking and increased presence on the ground targeting this, has reduced and reduced considerably. There are however wider issues about cost compliance that you will want to consider and that we would have to consider before introducing fiscal marking in the spirits world, for instance. Similarly, labelling for export only - and Baroness Symons is perhaps in a better position than I am to comment upon this - does have implications for our EU Article 29 obligations in terms of quantitative restrictions on exports. It is not a simple issue but you are absolutely right. It is important always to seek, and our law enforcement officers do seek, the support of the legitimate trade in their actions against smuggling.


  717. Baroness, do you want to comment on that?
  (Baroness Symons of Vernham Dean) I do not think I am in a position to comment on that right at the moment.

Ann McKechin

  718. As the Minister will be aware, the Climate Change Levy does not include natural mineral water because it does not have the correct substance to it. Also, there has to be a direct association between the production to qualify for the rebate which means, in the case of the whisky industry, it inevitably involves maturing of the product but it does not qualify. Does the government accept that the current operation of the Climate Change Levy does disadvantage these industries and is a review of the Climate Change Levy likely in the near future which will further consider representations regarding these apparent anomalies?
  (Mr Boateng) Administratively, we keep all taxes under constant review and, where there are anomalies, we are obviously prepared to receive representations in relation to them in order that the Chancellor can make a judgment. What one would say about the impact of the Integrated Pollution Prevention Control Directive on flavoured mineral waters as against pure mineral waters is that the Directive and the levy and the relationship between the two, the use of the directive in order to determine who gets a levy rebate, is targeted specifically on the issue of energy intensive processes. While the extraction and bottling of pure water does not fall within the IPPC, it is because it is not deemed to be and on the face of it is not an energy intensive process. The discounts were specifically designed to meet the needs of energy intensive processes. This is a very technical issue and Richard Summersgill should not hesitate to intervene if I begin to stray off course, not least because it was a little before my time. When the government was consulted on the construction of the Climate Change Levy, it did invite alternative suggestions for eligibility criteria.
  (Mr Summersgill) At the end of the day, the IPPC does provide legal certainty, administrative simplicity and, all importantly, compatibility with EU state aid requirements. It was not possible to find any alternative to that. It does create some anomalies and that is perhaps one of the most staring.


  719. Would whisky maturation be considered in the same way? It is not energy intensive.
  (Mr Summersgill) I think so. Whisky maturation usually happens away from most distilleries so it does not fall within the IPPC. Some of you will probably have greater experience of this than me but maturation warehouses, as I understand it, are neither heated nor chilled, so I would not expect them to be intensive users of energy.

33   See p 337. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 27 November 2001