Examination of Witnesses (Question Number
WEDNESDAY 31 OCTOBER 2001
BOATENG MP, MR
BRANKIN MSP, MR
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.
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.
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
(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.
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
(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
upsideand 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.
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
(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.
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, 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.
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
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
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.
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
(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 youalthough 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.
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.
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
(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