Mr Michael Jack (Fylde, Conservative)

I welcome you to our proceedings, Mr. Hood. When we broke from the morning session, I was observing that the Customs and Excise press release C&E2 stated that the measure had the full support of the National Association of Cider Makers. However, the representation that I received from Devon Contract Packing Ltd makes it clear that the measure was not put forward by the National Association of Cider Makers but, as the letter says,

``by the two largest manufacturers, privately, after an NACM meeting.''

The letter makes a further point:

``The worst part of the proposed legislation is the immediate implementation date. As there was no prior warning that this legislation was pending, or indeed no consultation with any of the firms who currently use DPD, we will be put in an impossible commercial position.''

That does not seem to me to be a very sensible way to go about things. Devon Contract Packing Ltd is a small enterprise and, as the hon. Member for Torridge and West Devon (Mr. Burnett) said, it is in an area that is suffering the economic ravages of the foot and mouth outbreak.

I hope that the Financial Secretary will give us some hard facts as to why the measure has been put forward. There is no specific information in the Government's propaganda about the potential duty losses. Devon Contract Packing Ltd says that it gains financially from the status quo to the same extent that the big cider manufacturers gain from their deposit arrangements. The letter concludes by proposing a complete review of cider duty, and that would be right way to discuss the measure.

Mr Richard Ottaway (Croydon South, Conservative)

I welcome you to the Chair, Mr. Hood. I endorse the remarks made by the hon. Member for Torridge and West Devon and my right hon. Friend the Member for Fylde (Mr. Jack). They made their points succinctly.

In truth, the argument boils down to two fundamental points. First, pre-existing contracts are in place. If the 12-month moratorium that has been suggested were allowed to come into effect, the small producers would not be put at a disadvantage. Secondly, the position of wine producers has not yet been addressed, and the small cider manufacturers feel that that is unfair. They argue that the regulations have been in place for 25 years and, if the wine producers are entitled to consultation before the rules are changed, they should have the same entitlement. My right hon. Friend the Member for Fylde made the point about consultation. Under the circumstances, we hope that the Financial Secretary has listened to the points that have been made.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I, too, welcome you to the Chair, Mr. Hood.

Clause 5 provides for an amendment to the Alcohol Liquor Duties Act 1979, which will give Customs and Excise the power to tackle tax avoidance practices in the production of cider and perry. I want to give a careful account of that, because the position is a little different from the one that we have been informed of so far.

The measure provides power to make regulations regarding operations and processes performed on cider and perry. In addition to regulating those activities, it will enable Customs and Excise to prohibit operations after the duty point that would, if they had been carried out before it, have resulted in greater duty being payable on the finished product. The most common example is the dilution of cider after duty has been paid. As we have heard, cider is dutied in bands according to strength. Dilution is a straightforward tax avoidance practice whereby cider is produced at the top end of a band and duty paid on that volume, and then diluted to decrease its strength but increase its volume, effectively reducing the duty liability of the finished product.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

Will the Financial Secretary give way?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

Before giving way, I must point out that dilution before the duty point is indeed standard practice in the industry but dilution after the duty point did not, as far as I know, begin until 1999. Neither the National Association of Cider Makers nor Customs and Excise are aware of any cider maker diluting after duty point—which would, if it were legal, be an obvious duty-avoidance technique—prior to February 1999. I will explain in detail how that process arose.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

I also welcome you to the Chair, Mr. Hood. It is a pleasure to serve under your chairmanship. I shall make a concise intervention and hope that I might catch your eye thereafter.

The situation is not as clear-cut as the Financial Secretary has asserted because, as I said this morning, there are at least three aspects: the small cider makers who dilute post duty cannot afford a bond; they pay duty on ullage and spillage—while the contrary is not the case for the large bonded companies; and they pay their duty upfront.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I shall come to each of those points. The smallest cider makers do not pay duty at all. We are talking about an operation whereby a medium-sized cider producer sends product in bulk to a bottling operation, rather than making cider. Small cider makers—the real cottage industry—do not pay any duty.

Cider makers have long been aware that the dilution of cider after the duty point is, in the eyes of the law, a tax avoidance scheme and that legislation to outlaw the practice would be introduced at the earliest opportunity. The National Association of Cider Makers—reference has been made to two large companies who belong to it—has fully supported that practice and has included a statement to that effect in its own code of practice. In the letter that it sent to all members of the Committee the association said:

``Ever since 1976, it has been a condition of NACM membership that no cider maker should indulge in this practice.''

I am not therefore sympathetic to any cider makers who have decided to engage in the practice and obtain a short-term gain over their competitors in a duty benefit. If cider makers have invested on that basis, they have done so entirely at their own commercial risk.

Cider duty was reintroduced in 1976. The Customs interpretation of the law at that time was that dilution of duty-paid cider was not allowable and, as I have said, that was fully supported by the National Association of Cider Makers. With the introduction of the single market and the adoption of the European Union structures directive, it was confirmed that operations performed after the duty point, which would result in more duty being payable, are not permitted.

In February 1999, PricewaterhouseCoopers, a company of some ingenuity in these matters, challenged the Customs' interpretation of UK law on behalf of a bottling company—not the one that hon. Members were talking about. Legal advice to Customs, taken in response to that challenge, was that legislative amendment would be necessary to make the practice clearly illegal. However, until February 1999 no one had thought that it was not illegal. In March, Customs informed PricewaterhouseCoopers that steps would be taken to prohibit the practice and, concurrently, the National Association of Cider Makers was informed; it fully supported the Customs' position, and in April 1999 issued advice to its members to that effect.

Sitting suspended for a Division in the House.

On resuming—

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I shall resume the chronology of events that I was running through. I referred a moment ago to a letter that I said had been sent to all members of the Committee. I understand that that is not the case; it was sent to members of the parliamentary cider group.

Mr David Taylor (North West Leicestershire, Labour/Co-operative)

Would that be termed in-cider trading?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

It probably would. If only I could think that quickly myself. However, as I said, the letter said that it had been a condition of NACM membership since 1976 that no cider maker should indulge in that practice. In April 1999, the NACM issued advice to its members outlining its support for Customs' position. It reads:

``In line with its established policy, NACM members are asked to ensure that wittingly or unwittingly they do not become involved in the supply of bulk duty-paid cider that may then be diluted and resold.''

The notice also pointed out that as consistently advised by Customs and Excise, the provision of duty-paid cider for resale is an offence. So the position was clear.

We did not include the provision in last year's Budget because of pressure on space in the Finance Bill, but Customs became aware last September of another bottling company—the one that operates in the constituency of the hon. Member for Torridge and West Devon—diluting duty-paid believed to be supplied to them by a then member of the National Association of Cider Makers. Customs wrote to Devon Contract Packing on 13 September explaining that although nothing in current law prevents that practice,

``We plan to legislate against the practice at an early opportunity.''

So the position was made clear to the company concerned seven months ago.

In the run-up to the Budget, the National Association of Cider Makers pressed for the law to be clarified. On Budget day, the NACM held its annual general meeting, during which the resignation of the company that is supplying the company in the hon. Gentleman's constituency was demanded, and the company ceased to be an NACM member from that date.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

May I clarify just one quick point of detail? Did the Financial Secretary say that the letter of 13 September was written to Devon Contract Packing?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

Yes, it was sent to a Mr. R. Jackson at that company.

Our view is that that activity is duty avoidance and that that has been known for 25 years. Our intention to legislate to achieve legal clarity has been known for at least two years. Devon Contract Packers was informed by letter more than seven months ago, so we are proceeding today in precisely the way that we said we would and that everybody has known that we would.

The hon. Gentleman and the right hon. Member for Fylde raised concerns about the position of the bond. Customs has the power to require a bond from an excise trader operating a duty suspense warehouse.

As the hon. Gentleman said, a figure of £250,000 was discussed with that company for a bond. However, after clarifying with the company what it wanted to do, Customs concluded that no bond was needed. The company is free to obtain duty suspended bulk cider, bottle it and to send it back to the supplier, and no bond will be required. I hope that that is helpful. A contrary view was put to the company at an earlier stage but that is the current position. In that light, I hope that the Committee will see that there is no disadvantage to this supplier or any other doing something similar.

How much money is at stake? No doubt the amount for that company is small, but if Parliament decided by rejecting the clause that this practice was, contrary to the understanding of the last 25 years, legal, all cider makers would do it, and why not since it would be a way of reducing their duty bills? Tens of millions of pounds would be at stake. We must make the position clear. I hope that the hon. Gentleman will accept that there is no disadvantage, either intended or in practice, to the company to which he referred, or to anyone practising similar activities.

Mr Howard Flight (Arundel & South Downs, Conservative)

I have a brief question. The Minister kindly advised me after our initial discussions this morning that the limit for small cider makers is 7,000 litres. In the case of genuinely small cottage industries, will the Government consider that limit with a view to reviewing it upwards? My understanding of the cider cottage industry is that sales of 10,000 to 15,000 litres are more typical than as little as 7,000 litres.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

The generous relief given is not available to brewers, although we have made an announcement about progressive beer duty. It is important that it is clearly targeted on the smallest producers. If the hon. Gentleman wants to make a case to me, I will have a look at it.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

I am grateful to the Financial Secretary for a clear exposition of the problem and the solutions as he sees them. The crucial point is that there is no prejudice against small cider makers as to the time when they pay the duty, whether or not they are bonded. That important point goes some way towards assuaging my doubts about the clause. He also told us a little more about the extent of duty that could be lost.

According to the Financial Secretary the practice of dilution, post duty, did not take place before 1999. I cannot contradict him, but that differs from the advice that I and others have received. If there are significant differences between the Financial Secretary's instructions and ours, we will revisit the point on Report.

Our cider market is dominated by two operators who have 90 per cent. of the market and considerable influence in the National Association of Cider Makers. I advise the Financial Secretary and any other Treasury Minister to ensure that a national body reflects the views of all its members. Having said that, I do not propose to vote against the clause and believe that my fellow Opposition Members are more content than they were.

Mr Richard Ottaway (Croydon South, Conservative)

I shall not detain the Committee as there is much to be done, other than to say to the hon. Member for Torridge and West Devon that one cannot put a razor blade between us on the points that he has made. We agree with his sentiment on consultation, timing, and the method of implementing the proposal. Nonetheless, we will not be voting either.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.