THE DRINKS INDUSTRY IN SCOTLAND
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".
The document further states that "divergent rates ...can
lead to increased cross-border purchasing and, indeed, fraud and
EU minimum rates of duty for alcohol are as follows:
|Minimum Rates of Excise Duty for Alcohol
|Spirits||550 euro per hectolitre of pure alcohol
||45 euro per hectolitre (ie. fortified wines) of finished product
|Beer||1.87 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.
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".
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.
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.
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.
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
runs counter to the ethos of the Single European Market. Some
40 per cent of all UK spirits are sold within the EU.
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
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".
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
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
324-i, Session 2001-2002, p.292, para 4. Back
on the competition between alcoholic drinks:
Report for the EC by Customs Associates Ltd, February 2001, para 1.6.5,
114-v, Session 2000-01, p.257. Back
to Trade, The Scotch Whisky
Association, 1998, para 4.1. Back
114-v, Session 2000-01, p.269, para 4. Back
details see HC 114-v, Session 2000-01, p.275, Annex A. Back
973-ii, Session 1999-2000, Q.159. Back
324-i, Session 2001-2002, Q.710. See also Q.695 and Q.698. Back