Select Committee on Scottish Affairs First Report


5. EU minimum rates

63. In European Union terms the economic complexities created in the domestic market by the application of various levels of excise duty on different types of alcohol are exacerbated by the Rates Directive of 1992 which created the minimum rates system. This was a fudge arrangement agreed to in advance of the start of the Single Market. It allows member states to set their own levels of excise duty, subject to a statutory basic minimum. In the words of the memorandum from the European Commission: "It can be said that, largely, the minimum rates merely reflect the situation that existed prior to 1 January 1993. The result is that Member States currently apply widely divergent rates".[73] The document further states that "divergent rates ...can lead to increased cross-border purchasing and, indeed, fraud and smuggling".[74] EU minimum rates of duty for alcohol are as follows:

Minimum Rates of Excise Duty for Alcohol
Spirits550 euro per hectolitre of pure alcohol
Intermediate products   45 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)

64. In March 2000 the European Commission announced that it would undertake both a study on competition between the various types of alcoholic drinks and a consultation exercise. It promised to report by the end of 2000.[75] The competition study became available in February 2001. The Commission's report of its review is awaited.

65. The competition study said that the minimum rates had produced an effect in some member states when they were first introduced; seven states had been required to increase their rates in order to comply with the new minimum. But since the minimum had not changed since 1992, it was becoming less relevant each year due to inflation. Four member states now had rates below what would have been necessary in an indexed minimum. The study concluded that the minimum rates policy was "generally ineffective in its current form".[76]

66. To its credit the European Commission recognised from the start that the removal of fiscal frontiers would, without approximation of national rates of excise duty, lead to the consequences that have become manifest: increased cross-border shopping, fraud and smuggling. Its proposals for common rates of duty, and, later, levels of minimum rates higher than those which now apply were both rejected by the Council of Ministers who eventually adopted the present Directive.[77] To say that the system has created anomalies in the application of a single market in alcoholic drinks is an understatement. The Scotch whisky industry has argued strongly that the minimum rates system enshrines discrimination against spirits.[78]

67. Under the terms of Directive 92/82/EEC, the Commission is required to undertake a review every two years and, if necessary, recommend proposals for change. The first report, in 1995, made no proposals for change, but merely called for further consultation. The UK Government called then for the retention of fiscal sovereignty but argued that the existing minimum rate on spirits discriminated against the spirits industry and acted as a barrier to EU trade.[79] No reviews were undertaken in either 1996 or 1998 despite the requirement of the Directive, and the situation remains essentially as it was in 1992.

68. The opinion advanced by the UK Government at the time of the 1995 review, that the structure of taxes imposed on different alcohols discriminated against spirits and is a barrier to free trade within Europe, remains accurate. Furthermore, it seems to us that the current structure of minimum rates, which sets a zero rate on wine, a low rate on beer and a high rate on spirits[80] runs counter to the ethos of the Single European Market. Some 40 per cent of all UK spirits are sold within the EU.[81] A move towards a more equitable structure dispensing with an unjustifiable system of discriminatory taxation would be of considerable benefit to the Scottish spirits industry and the UK economy. This is not a call for fiscal harmonisation. The minimum rates system is badly flawed and in need of change, it is though accepted. It should be possible in the short-term to use the existing basic structure to devise an adjustment which would set minimum and maximum rates, or an area of permissible divergence from a central norm, which would be more democratic in terms of the EU market in alcoholic drinks.

69. The Financial Secretary to the Treasury expressed to us the Government's concern about the current system. He believed changes to the level of rates should be made. He said: "We want to see the minimum rates for spirits reduced".[82]

70. One way or another greater fairness must ultimately be introduced. The current minimum rates system is in need of reform. In the meantime, we would, at the very least, expect there to be proper attention to procedures. The failure by the European Commission to produce the requisite reviews in 1996, 1998 and 2000 is a dereliction of duty which we criticise in the strongest terms. During oral evidence, the Financial Secretary to the Treasury gave us an assurance that he would "write to the relevant Commissioner"[83] about the matter. It is hard to discern why efforts at ministerial level have required our prompting. We believe that the UK Government should continue to argue in favour of the reform of the existing minimum rates system, which, it acknowledges, discriminates against spirits. The system, unsatisfactory from the start, is now well past its sell by date. There is no more basis for the discrimination against spirits at the EU level than in UK taxation. We believe that similar criteria should apply.

73  HC 114-v, Session 2000-01, p.257. Back

74  Ibid. Back

75  HC 324-i, Session 2001-2002, p.292, para 4. Back

76  Study on the competition between alcoholic drinks: Report for the EC by Customs Associates Ltd, February 2001, para 1.6.5, p.17. Back

77  HC 114-v, Session 2000-01, p.257. Back

78  Barriers to Trade, The Scotch Whisky Association, 1998, para 4.1. Back

79  HC 114-v, Session 2000-01, p.269, para 4. Back

80  For details see HC 114-v, Session 2000-01, p.275, Annex A. Back

81  HC 973-ii, Session 1999-2000, Q.159. Back

82  HC 324-i, Session 2001-2002, Q.710. See also Q.695 and Q.698. Back

83  Ibid, Q.711. Back

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Prepared 28 November 2001