Select Committee on Scottish Affairs First Report


6. Cross-Channel shopping and smuggling

71. The alcoholic drink producers who gave evidence during the inquiry said that the high level of excise duty imposed by the UK Government was the underlying cause of smuggling and cross-Channel shopping.[84] Cross-Channel shopping, as the term suggests, involves legitimate purchase and importation for personal use, excise goods upon which duty has been paid. Smuggling in the context we are referring to invariably means the importation of excise goods, upon which duty has been paid at a lower continental rate, which it is purported are for personal use, but which in fact are destined to be sold on (the so-called "white van trade"). BLRAS noted that the duty on a pint of beer was 32 pence in the UK but only 4 pence in France and argued that the difference in duty rates between the UK and Europe "represent a direct economic incentive for personal imports, smuggling and fraud".[85] BLRAS believed that the cross-Channel trade has trebled since 1992.

72. BLRAS said that the equivalent of 1.5 million pints of beer is brought into the UK every day, and that "around 75 per cent of this is destined for illegal resale".[86] They reasoned that this incentive to smuggle encouraged criminality, threatened employment in legitimate businesses and in the rural economy. The industry is "far from convinced that penalties and enforcement alone will deal with the problem of smuggling".[87] BLRAS believed that reductions in duty are needed to deal with these problems. Drinks producers seemed to think that the UK excise system was becoming unworkable, and that the Government was often unable to collect the taxes it sets.

Cross-border shopping

73. Before the completion of the Single Market at the beginning of 1993, cross-border traffic was strictly regulated. Within well-defined limits alcoholic drinks could be imported duty and tax free. Above those limits duty became payable. The Single Market brought to an end routine border checks of both private and commercial traffic. Strict personal allowances applying to travel within the EU were also dispensed with. Given the high rates of alcohol duty in the UK, particularly compared to France, the changes have we have noted led to an increase in cross-border shopping, along with cross-Channel smuggling of excise goods.[88]

74. As the above Table illustrated,[89] there are large difference in the levels of duty imposed between the UK and most of Europe. As at July 2001, UK taxes on beer and spirits were, respectively, the third and fourth highest within the EU.[90] The introduction of the Single European Market means that UK consumers now have far greater scope to make personal imports, and thus to legally avoid paying these higher rates.

75. The European Commission study on competition between alcoholic drinks identified the UK as the EU member which lost most revenue through cross-border shopping involving alcohol. It estimated the figure at £400 million per annum.[91] HM Customs and Excise came up with a slightly lower estimate, placing the 1998 loss at £290 million and the 1999 loss at £370 million.[92] This compared with total revenue receipts from alcohol in 1999 of £11.3 billion.[93] While the revenue loss represented a hole the Treasury should endeavour to plug, it does not suggest that the current tax base is at the moment being seriously called into question. Most people appear willing to continue to pay the existing level of excise duty, or at least are unable to access cheaper drinks by cross-border shopping.

76. Indeed, the Institute of Fiscal Studies price sensitivity estimates suggest that the Government could compensate for the revenues lost from cross-border shopping by an appropriate shift in tax rates. These estimates imply that increases in the duty on beer and wine would cause an increase in the total excise revenues.

77. The IFS study into the price sensitivity of UK alcohol spending found no significant differences before or after the introduction of the Single Market.[94] IFS further found that there were no significant differences in price sensitivity between the different regions of the UK, specifically that consumers in the South East did not appear to be more likely to take advantage of their easier access to low tax European products.[95] Both of these findings are contrary to what we might have expected, and both seem to indicate that the extent to which consumers have indulged in cross-border shopping in order to evade high UK excise taxes has been relatively limited. The evidence suggests that cross-border shopping creates some problems for optimising revenue. But experience to date does not indicate that they represent a major argument in favour of reducing excise taxes in order to limit the amount of such commerce.

78. The Gin and Vodka Association of Great Britain referred to the situation in Switzerland where discriminatory tax on imported spirits had resulted until 1999 in a large differential in tax between that county and its immediate neighbours. This had caused a significant increase in cross-border shopping. When in July 1999 the Swiss authorities reduced that tax by around 50 per cent, bringing it in line with domestically produced spirits and, thereby, the French duty rate, the outcome was as GVA noted "cross-border shopping was virtually eliminated and the volumes of sales in Switzerland have more than doubled".[96]

79. GVA also pointed out that, of the EU countries with a large excise duty differential with their neighbours, only the UK was not undertaking a review of the situation.[97] Similarly the SWA drew attention to the fact that Scandinavian countries were considering whether it would be pragmatic to reduce their high excise duty rates in the light of cross-border shopping into Germany and throughout the EU.[98] We think it reasonable that the Government should be expected to undertake a comprehensive study on the revenue implications of the wide margin between excise duties in the UK and those apparent in most other EU countries operating in a Single Market.

80. The consultation process this would involve might allow all the vested interests, including the Government, to achieve some consensus about the economic effects that the machinations of the Single Market with regard to alcohol has created. We believe that, for a variety of reasons, including the increasingly detrimental impact on health in the UK,[99] that the approach to excise duty on alcohol in general in the UK is not unduly onerous.


81. In a memorandum to us submitted in September 2001, HM Customs and Excise estimated that in the year 1999-2000 the revenue lost (duty and VAT) to all forms of alcohol smuggling and fraud was around £800 million.[100] The greatest loss was in respect of spirits, estimated at £500 million.[101] Losses from beer amounted to around £100 million, those from wine to £200 million.[102]

82. Smuggling causes problems for law and order and in the operation of legitimate businesses. The SWA argued that the extent to which it was now happening undermined brand names and the associated advertising expenditure. This in turn was a threat to profitability, creating difficulty with the maintenance of price levels. Smuggling and the resultant illegal distribution also inhibits the Government's ability to control where alcohol is sold. BLRAS evidence illustrated that young people find it relatively easy to obtain access to smuggled beer.[103]

83. The problem of cross-Channel smuggling is currently being addressed in parallel with the campaign to combat tobacco smuggling. An additional 170 officers have been made available specifically to target all forms of cross-Channel smuggling. In Scotland 150 detection staff are deployed.[104] The aim is to reduce the revenue loss from all smuggling activity involving excise goods by 10 per cent a year.


84. As the memorandum from HM Customs and Excise pointed out, diversion fraud is different from smuggling and has a variety of forms. It involves ostensibly legitimate goods travelling from duty suspended warehouses in the EU to duty suspended warehouses in the UK, which become sidetracked en route. Concealment is not necessary and paperwork can seem to back up irregular consignments.[105] It is believed that most illicitly available spirits are the result of diversion fraud and freight smuggling. A recent report from the National Audit Office estimated that between 1993 and 1999 diversion fraud caused the loss of £668 million in alcohol duty.[106]

85. In July 2001 a report on The collection of excise duties in HM Customs and Excise, undertaken by Mr John Roques on behalf of the Paymaster General and HM Customs and Excise was published.[107] The report was commissioned in response to concerns about weaknesses in the control of excise duty collection, particularly since the creation of the Single European Market which had made it easier for criminals to evade such duty. The system controlling the movement of alcohol was especially open to exploitation.

86. The principal aim of the report was to gauge the effectiveness of duty collection. It reached the clear conclusion that there were shortcomings. Several basic failures in the control system were identified. For example, HM Customs and Excise approved designated warehouses for the storage, without duty, of goods that are liable for duty. HM Customs and Excise appear not to have known how many approved warehouses existed in 1993[108] and were unable to explain why the number of approved sites appeared to grow substantially in the period thereafter. As the report stated:

    "This is an indication that, in 1993, the Department did not have the basic information necessary to equip it with the Single Market regime".[109]

87. Other problems identified in the Roques report included data handling and estimation procedures used by HM Customs and Excise.[110] With the adoption by HM Customs and Excise, wholly or in a modified form, of 62 of the 65 recommendations made in the report,[111] the Department is seeking to resolve the deficiencies which were referred to. Until the effectiveness of these changes have had sufficient time to manifest themselves, it is not possible adequately to assess the claim that a realignment of UK excise rates is required if revenue losses arising from smuggling are to be eradicated.

Due diligence

88. The SWA drew attention to the complexities involved with moving bonded products. It described the system as "creaking".[112] EU spirits producers are allowed to sell and move their goods within the Single Market in "Duty Suspension".[113] Basically, a drinks exporter has, within two months, to receive from a destination authorised warehouse elsewhere in the EU, an administrative accompanying document (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.[114]

89. 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[115] has caused the SWA to argue that a defence of due diligence should be admissible when irregularities arise. This seemed to us to be a valid and reasonable request, particularly in the light of the evidence compiled in the Roques report concerning the administration within HM Customs and Excise. But the Financial Secretary to the Treasury told us:

    "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".[116]

90. However from September 2001, a marginally more flexible system was introduced whereby warehouse keepers are able sometimes to limit their liability when they cannot control the ultimate delivery of the load. The Financial Secretary explained that the revised procedures would require transporters or owners of the goods to provide the guarantee for the duty on the load.[117] The Financial Secretary acknowledged that when the warehouse keeper was the owner of the goods the change would be "limited".[118]

91. We take the Financial Secretary's point that liability for duty is a powerful incentive on exporters to make sure that goods are not lost or stolen.[119] But, given the current circumstances and complexities surrounding the Single Market in alcoholic drinks, particularly those connected with wide variations in excise duty and the incentive this provides to criminals to manipulate the system to their advantage, the Department should, if that is what is required, approach the European Commission with a view to seeking an amendment to the Holding and Movement Directive. We believe that spirits producers should be allowed the defence of due diligence when consignments (and therefore revenue) are lost, if incontrovertible proof of the exporter concerned acting responsibly, appropriately and in good faith can be demonstrated; and that appropriate steps should be taken to see that this happens.

84  HC 973-ii, Session 1999-2000, p.40, para 3.5, HC 114-i, Session 2000-01, p.73, para 3.2 and HC 114-ii, Session 2000-01, p.117, para 21. Back

85  HC 114-i, Session 2000-01, p.73, para 3.2. Back

86  Ibid, p.75. Back

87  Ibid, p.73. Back

88  HC 324-i, Session 2001-2002, p.294, paras 18 and 19. Back

89  Para 44. Back

90  Ibid. Back

91  Study on the competition between alcoholic drinks: Report for the EC by Customs Associates Ltd, February 2001. Back

92  HC 324-i, Session 2001-2002, p.295, para 21. Back

93  Ibid, para 1. Total receipts for 2000-2001 are given as £11.7 billion. Back

94  HC 114-ii, Session 2000-01, p.141, para 3. Back

95  IbidBack

96  Ibid, p.129. Back

97  Ibid. Back

98  HC 973-ii, Session 1999-2000, Q.183. Back

99  See para 144 et seqBack

100  HC 324-i, Session 2001-2002, p.295, para 24. See also Q.702. Back

101  Ibid. Back

102  Ibid. Back

103  HC 114-i, Session 2000-01, p.94. Back

104  HC 324-i, Session 2001-2002, Q.713. Back

105  IbidBack

106  Losses to the Revenue from Frauds on Alcohol Duty: Report by the Comptroller and Auditor General, Session 2001-2002, HC 178, 19 July 2001. Back

107  Cm 5238, July 2001. Back

108  Ibid. p.9, para 3.3. Back

109  Ibid. Back

110  Ibid, p.12. Back

111  HC 324-i, Session 2001-2002, p.296, para 31. Back

112  HC 973-ii, Session 1999-2000, Q.161. Back

113  HC 324-i, Session 2001-2002, Q.700. Back

114  IbidBack

115  IbidBack

116  Ibid, Q.705. Back

117  Ibid. Back

118  Ibid. Back

119  IbidBack

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