Memorandum from The Scotch Whisky Association
Letter to the Clerk from the Director of Government
and Consumer Affairs, The Scotch Whisky Association
Thank you for inviting the industry to update
its submission to the "Inquiry into the Scottish Drinks Industry".
In the attached paper we have summarised any
salient developments in the key issues affecting the industry.
You will recognise many of the headings from our previous submission,
but we have also taken this opportunity to draw your attention
to the potential impact of the COMAH and Freshwater Fisheries
If you require further information on these
or any other points, please do not hesitate to get in touch.
Director of Government and Consumer Affairs
The Scotch Whisky Association
The Scotch Whisky Association Update
1. This paper updates The Scotch Whisky
Association's November 2000 submission to the Scottish Affairs
Select Committee's "Inquiry into the Drinks Industry in Scotland".
To prevent repetition, we have restricted comment to those areas
where significant developments have taken place.
2. However, we would also reiterate that
the industry's priority is to end discrimination against Scotch
Whisky in the UK. In 2001, the Chancellor froze the duty on spirits
for the fourth consecutive year, and this was welcomed by the
industry. Nevertheless, the 2001 Budget did not reduce the tax
differential between Scotch Whisky and other alcoholic drinks.
3. This year, the industry will again advocate
a 4 per cent duty cut. Even with a year on year cut of 4 per cent,
it will take almost 10 years to achieve tax parity with other
alcoholic drinks. A single rate of duty based on alcohol content
for all alcoholic drinks would finally lay to rest an archaic
system that discriminates against Scotch Whisky and other UK spirits,
and which is against the interests of the wider economy.
4. In the past year alone, the industry
has had to contend with several new pieces of legislation, the
impact upon the industry of several of these is examined in the
following pages. While each piece on its own may not amount to
a great deal of money, the cumulative burden is a significant
squeeze on the competitive position of the industry. Many economically
fragile communities depend upon the Scotch Whisky industryunnecessary
regulation threatens their long-term future.
The Water Framework Directive
5. Consultation on the implementation of
the Water Framework Directive is now well underway in Scotland.
The Scottish Executive issued its first consultation paper in
June and has since held a conference for interested parties to
meet and exchange views. The industry also met with the Deputy
Minister for the Environment on 18 September and we are grateful
that the consultation process is proving to be so thorough and
6. A summary of our position on the implementation
of the Directive is set out below:
the Scotch Whisky Association is
keen to ensure that the legislation implementing the Directive
does not overburden the industry with unnecessary restrictions
or red tape. The legislation should allow the industry to maintain
production in an economically, environmentally and socially sustainable
way. Forty thousand jobs depend upon the industry; great care
should be taken to ensure that regulation is not imposed simply
for regulation's sake;
crucially, the Scottish Executive
should make full use of the exemption provision contained in Article
11(3)(e) of the Directive, which allows Member States to exempt
from controls abstractions that have no significant impact on
"significant impact" should
be interpreted as "significant harm" and only those
distilleries deemed to be causing significant harm should be considered
for licensing or controls. Distilleries that do not harm the water
source should not have to apply for exemption. The onus of proof
should rest with the competent authority;
to comply with the European Convention
on Human Rights, the Executive should set up an independent appeals
procedure, where decisions on detailed control conditions and
the requirements for licensing can be reviewed; and
the charging system should not go
beyond cost recovery or penalise industry on the pretext of encouraging
the efficient use of water. Such economic instruments have no
place in Scotland as most parts of the country have an abundance
7. We look forward to working with SEPA
in a constructive manner to secure jobs in the industry for the
The Freshwater Fisheries Regulation
8. A further water related issue that could
seriously affect certain distilleries is the temperature limits
laid out by the Freshwater Fisheries Regulation 1997. The regulation
seeks to set a limit of a 1.5oC increase in temperature for warm
water discharges (the water that is used for cooling and then
returned to the water source). The strict imposition of such a
limit would seriously affect the viability of some distilleries,
particularly in the summer months.
9. SEPA has been awaiting the results of
research into the impact of temperature uplifts on Atlantic salmon,
jointly funded by the Scottish Executive and the industry. The
results indicate that temperature increases of up to 5oC have
no adverse effect on the development of Atlantic salmon. SEPA
will now consider the report.
10. In view of the strong scientific evidence
in this report it is hoped that an application for derogation
from the regulation will be supported by SEPA and then made by
the Scottish Executive or UK administration to the European Commission.
The report demonstrates that there is no environmental reason
to limit temperatures to the 1.5oC proposed. The industry hopes
that other considerations will not determine the decision.
11. Illegitimate trade, and the control
loopholes that facilitate it, damage the Scotch Whisky industry's
interests as well as the Exchequer's The industry is pleased that
John Roques' investigation into the problems that led to the excise
evasion fraud of the 1990s was both thorough and independent.
12. To coincide with the publication of
the Roques report, and the accompanying report from the National
Audit Office, Customs and Excise have for the first time published
estimates of the scale of fraud. Although Customs and Excise have
now successfully stemmed the types of "outward diversion
fraud" prevalent in the mid-1990s (which prompted the Roques
inquiry), they estimate that large-scale spirits fraud (especially
"inward diversion fraud") still equated to up to £500
million of lost revenue in 1999-2000. This is equivalent to some
16 to 18 per cent of total tax receipts from legitimate sales
of spirits. Clearly there remains a substantial problem.
13. The industry was concerned that the
Government would respond to such problems by burdening the legitimate
trade with new control measures, rather than focussing on the
fraudster. Whilst the industry is still considering the detailed
Roques recommendations and the Government's response to them,
it does appear that much of the report does not impinge unnecessarily
on the legitimate trade. Nevertheless, there are a number of proposals
which could have a significant practical impact, and representatives
of the industry are already holding constructive discussions with
Customs and Excise officials to ensure the smooth implementation
of the proposals.
14. Following one of the recommendations,
Customs and Excise have initiated a feasibility study into the
possible application of UK fiscal marks to alcoholic beverages,
the primary focus of which will be on spirits. The industry is
co-operating fully with this study, and a number of major SWA
member companies are working closely with the Customs and Excise
project team to identify the potentially enormous costs, burdens
and practical aspects. It is worth stating that the EU spirits
industry, often with the support of the UK Government, has always
strongly opposed the use of fiscal marks (usually in the form
of strip stamps) for individual EU, and other overseas, markets.
These are often discriminatory against spirits, and within the
EU they further undermine the principle of a Single Market.
15. The industry reiterates the concerns
expressed in its earlier submission about the duty exposure it
suffers because of a flawed EU control/documentary framework for
the holding and movement of excise goods.
16. In a euphemism used by Mr Roques, the
industry considers that one of the most effective control measures
would be "to reduce the profitability of smuggling".
He notes that "the UK has amongst the highest duty rates
in the EU and subsequently the greater problems in tackling fraud".
He agrees with the conclusion that "a lack of harmonised
excise duty rates" is a continuing constraint to the implementation
of effective controls.
17. In 2000, the European Commission's discriminatory
targeting of cereal-based spirits for cuts in export refunds directly
undermined the Scotch Whisky industry. Distillers using EU maize
have been seriously affected by the cuts as the EU price for maize
has remained well above the world price. One site alone estimates
that the reduction in maize refunds will cost £0.5 million
in 2001, at a time when there are other significant cost and regulatory
pressures. We can see no justification why the Scotch Whisky industry
has been targeted while other EU maize processors continue to
receive refunds at the full rate.
18. At present, EU/world price convergence
means that distillers using EU wheat or barley have not yet felt
the full effects of the refund cuts. However, if EU and world
prices should diverge again in the future, these distillers shall
also be forced to pay far more for EU wheat and barley than those
processors still eligible for refunds.
19. The Commission promised the UK that
it would review the market effect of the targeted refund cuts.
The industry hopes that the UK government will continue to urge
the Commission to visit the industry to learn its views and experiences
Inward Processing Relief
20. The Commission indicated that cuts to
export refunds would be mitigated by easier access to Inward Processing
Relief (IPR), the alternative form of compensation by which EU
processors of export products can obtain levy-free access to world-priced
21. The Scotch Whisky industry argued that:
(i) when calculating IPR, the Commission
should take account of the refunds removed from all targeted products,
including cereal-based spirits; and
(ii) targeted sectors should be given priority
access to the facilitated form of IPR.
22. However, when the Commission calculated
the IPR level for 2002, it largely ignored the refund requirements
of those whose refunds have been abolished or reduced. Therefore,
far from giving priority to those sectors hit by refund cuts,
the Commission continued to discriminate against them. Facilitated
IPR was originally presented as a sweetener for those industries
facing cuts. It clearly cannot perform this function if insufficient
account is taken of the refund requirements of the targeted industries.
Climate Change Levy
23. The UK spirit drinks sector successfully
negotiated a Climate Change Agreement with the then Department
of the Environment, Transport and the Regions. In exchange for
challenging energy efficiency targets to the year 2010, 71 distilling
sites across the UK will receive 80 per cent discount in the CCL.
24. Nevertheless, it is estimated that the
CCL will still add £1 million per annum to the industry's
costs, even taking account of the 80 per cent discount and the
reduction in National Insurance Contributions.
25. The industry's bottling halls, which
are generally not co-located with distilling operations due to
the size, geography and economics of the industry, remain unable
to obtain the 80 per cent discount because of the widely-criticised
way in which the eligibility criteria were framed. This is still
considered a gross anomaly. It is manifestly inequitable that
other similar industries, where the production and packaging operations
happen to be co-located, receive the 80 per cent discount across
all the operations. Again this squeezes the industry's competitive
position and it is all the more keenly felt given that the discount
schemes were specifically intended by the Chancellor to protect
the interests of "those sectors particularly exposed to international
26. The CCL has, as predicted, been riddled
with other anomalies and devils in the detail, and has involved
an unprecedented amount of bureaucracy and management time. It
has been described as a "charter for consultants and lawyers".
Many have questioned whether it was the best way to achieve the
laudable environmental objectives that it set out to achieve.
27. Indications were given before the General
Election that the Treasury might be willing to review the CCL
policy framework, especially the eligibility criteria. The industry
calls for a full, meaningful and early review.
Control of Major Accident Hazard (COMAH) Regulations
28. The Control of Major Accident Hazard
(COMAH) Regulations are designed to minimise the risk of major
accidents occurring at industrial sites that handle "dangerous
substances". COMAH applies to chemical plants and oil refineries,
and because Scotch Whisky is a flammable substance, it too comes
under the scope of the regulations. The COMAH regulations are
enforced jointly by the Health and Safety Executive (HSE) and
the Scottish Environmental Protection Agency (SEPA) because COMAH
covers both the safety and environmental dimensions of potential
29. While the Scotch Whisky industry has
little disagreement with the application of COMAH from a Human
safety viewpoint, we question the degree to which Scotch Whisky
operations create environmental "major hazards" or are
capable of a "severe environmental impact" as defined
under COMAH. The industry accepts that accidents can be harmful
to the environment, and of course already complies with a host
of other environmental regulations enforced by SEPA. The issue
is about the degree of environmental harm and the extent to which
the industry falls within the environmental scope of COMAH.
30. For example a fire at a whisky warehouse
would not cause "permanent or long-term" environmental
damage. Neither the whisky, the casks nor the warehouse itself,
emit toxic fumes when alight. Compared with some of the other
hazardous industries covered by the Regulations, the risk to the
environment is much lower.
31. The industry believes that any measures
proposed under COMAH by the joint Competent Authority (CA ie.
HSE and SEPA) should be consistent and proportionate to the risk
of a major accident hazard.
32. There has been very fruitful co-operation
during recent years between the industry and the HSE over the
interpretation and application of safety regulations. Our recent
health and safety record has been very good. Recently the industry
held constructive meetings with SEPA and particularly the HSE,
to discuss its COMAH concerns and the agencies' support for industry
COMAH workshops has been much appreciated.
33. However, following these meetings there
still remains particular concern regarding Regulation 4 of COMAH.
This states that "every operator shall take all measures
necessary to prevent major accidents" and that the risk should
be reduced to a level as low as reasonably practicable (ALARP).
The exact interpretation of these phrases is believed to be under
consideration within government.
34. The CA suggested in a letter to one
of our members that "All Necessary Measures" must be
taken to prevent major accidents unless the costs became "grossly"
disproportionate to the benefits. The implication being that the
CA could enforce measures where costs are "disproportionate",
but not "grossly disproportionate" to the benefits.
Our concern is that we may be required to spend excessive sums
of money covering every conceivable eventuality. We would also
consider it "disproportionate" if best available practice
were required at an early date at all COMAH sites (including older
ones). Such large-scale capital replacement programmes must by
their nature be long-term.
EU Minimum Rates Review
35. The economic consultant's report referred
to in our original submission was delivered to them in the spring.
DG Taxud have regarded it as only one strand of the information
that they are drawing upon in formulating their review of the
Minimum Rates Directive.
36. The timetable for proposals from DG
Taxud has slipped several times. They now advise that the report
on the functioning of the Minimum Excise Rates for alcoholic beverages,
together with any proposals for change, will not be circulated
among Commissioners before October. Following consultations with
the other Commissioners, an official report, together with any
proposals for change, will be submitted to the Council and the
37. It is expected that DG Taxud will introduce
a package of measures aimed at improving the functioning of the
single market by addressing the tax disparity between different
categories of alcoholic drinks, and also between different Member
38. The industry welcomes the UK's approach
that any reform of the Minimum Rates must deal with the discrimination
against spirits contained in the current Minimum Rates structure.
The industry urges the government to remain firm in this aim when
negotiations over the Commission's proposals commence.
Update India and Turkey
39. India is the largest whisky market in
the world, but Scotch Whisky has been almost excluded from it
for some 40 years. Until 1 April 2001 the importation of Scotch
Whisky (and other spirits) for the domestic market was prohibited
by stringent import licensing requirements. Following their removal,
the Indian Government has sought to restrict spirits imports by
imposing an exorbitant and discriminatory fiscal burden, ranging
between 464 per cent and 706 per cent. This has led to an EU démarche
to the Indian government.
40. A similar situation prevails in Turkey
where, despite a Customs Union agreement with the EU that is designed
to facilitate trade between the two zones, formidable barriers
remain. These include unreasonable import permit and certification
requirements, the state monopoly's sole distribution rights for
most categories of spirit, and excessive excise taxes (around
190 per cent). Serious efforts are currently being made to amend
draft legislation whose effect would be to block meaningful market
access to most companies for at least the next five years.
41. Scotch Whisky remains one of the major
industries in the Scottish economy, and one of the leading manufactured
export earners for the UK.
42. We believe that the above update, together
with the earlier written submission and the oral evidence given
to the Committee, demonstrate the importance of ensuring that
the excise duty and wider regulatory burden should not impose
an ever increasing squeeze upon the industry's competitive position,
if it is to flourish over the long-term, thus securing jobs and
generating export sales for the benefit of the local and national
The Scotch Whisky Association
1 HC 973-ii, Session 1999-2000, pp 39-46 and pp 69-70. Back
Full title "Surface Waters (Fishlife) (Classification) (Scotland)
regulations 1997". Back