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Orders of the Day — Finance Bill

Part of the debate – in the House of Commons at 7:10 pm on 20th April 2004.

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Photo of Alan Reid Alan Reid Opposition Whip (Commons) 7:10 pm, 20th April 2004

The issue concerns more than jobs in distilleries, because the whisky industry provides many jobs in bottling plants, which are often located in urban areas where it is difficult to find other jobs. The tax stamp will also affect the constituency of the hon. Member for South Norfolk, because much of the barley used in the distilling process is sourced from East Anglia.

It is clear that there is a problem with duty fraud, but it is dubious whether it occurs on the scale claimed by the Government. We must tackle fraud where it occurs, but we must also ensure that the benefits of any anti-fraud measure outweigh the costs of its introduction. The Scotch whisky industry is also interested in stamping out fraud: it rose to the challenge that the Chancellor set for it in the pre-Budget statement last November, and it has come up with a raft of anti-fraud measures that are far less costly than the tax stamp measures in clause 4.

The Government proposals relate to three uncertain points—the level of duty fraud, the impact of tax stamps on fraud and the cost of tax stamps to the whisky industry. There is simply not enough evidence to demonstrate that the benefits of such a scheme would outweigh those costs, so it should not be introduced in this Bill. The risks to the economies of small, remote communities far outweigh the positive benefits to the Treasury.

I shall examine the Government estimates of duty fraud, which are arrived at by gap analysis—using consumer surveys to estimate consumption and subtracting the recorded legitimate trade. Gap analysis relies on consumers accurately remembering their consumption. Remember, we are discussing alcohol—I see that the Financial Secretary is laughing—and gap analysis relies on people accurately remembering their consumption in order to work out the level of fraud, so the margin of error is clearly wide. The Government rely on the Customs and Excise estimate of £600 million of spirits duty fraud in 2001–02.

However, when the National Audit Office conducted an investigation, it found a massive degree of uncertainty and concluded that a proper reporting of the Customs and Excise study would show that duty fraud was somewhere between £330 million and £1,080 million, not the single figure of £600 million quoted by the Government. The NAO also investigated the gap analysis estimates calculated by the Scotch whisky industry and concluded that its survey estimated the level of duty fraud at somewhere between £10 million and £260 million—considerably less than under the Customs and Excise methodology. The NAO found both methodologies to be theoretically "appropriate". It is obvious, however, that both could not be correct, so faced with two widely conflicting estimates, it sensibly concluded that

"great care is needed in determining what reliance is to be placed on the results that are presently available."

Even further doubt was cast on Customs and Excise's methodology for estimating duty fraud by the fact that its annual report for 2002–03 noted that the gap analysis method found that duty fraud on beer was negative. The only conclusion that one can draw from that is that beer drinkers remember drinking a lot less, whereas whisky drinkers remember drinking a lot more. Perhaps whisky is better value for money. The NAO's conclusion that we need to use great care with regard to the Customs and Excise estimates is a warning that the Government should heed. It is important to bear in mind that estimating the level of fraud is not just a theoretical exercise, because if the Government have overestimated it, the reduction in fraud that tax stamps will bring is similarly overestimated.

As regards the tax stamp's potential impact on fraud, the evidence from abroad is certainly not encouraging. A wide range of countries have introduced tax stamps or thought about doing so and found that they simply do not work. That is why the United States decided to abandon its tax stamp scheme 20 years ago. When Norway considered introducing a scheme, the British Government of the time wrote to their Norwegian counterparts to recommend that they did not do so because it would not work. The hon. Member for South Norfolk mentioned Ukraine, where a new stamp with a hologram seal similar to the one the Government are considering was introduced, yet within a few weeks 60,000 bottles of vodka with very good forged stamps were found. The Government themselves do not seem to think that the tax stamp will have a dramatic impact on fraud. In their analysis report, they estimate that it will reduce fraud by only about a quarter—hardly a dramatic reduction.

We all know that forgeries will be so good that it will take an experienced Customs and Excise officer to spot them. Ordinary shopkeepers and customers will be taken in, so raids on shops by Customs officers will still be necessary. As we know from evidence given by Customs and Excise to Select Committees, such raids are already able to detect fraud. For example, when officers recently carried out an exercise in the London area, they visited 300 retail premises and found illicit spirits in nearly half of them. What extra benefits will tax stamps bring when current methods can already detect illicit spirits in the shops? Those raids, which involve targeting sectors of the trade that are suspected of being involved in fraud, are surely a better way to detect it than introducing an expensive tax stamp scheme. That is only one of a whole raft of alternatives suggested by the Scotch whisky industry.

Another proposal involves warehouse keepers providing information to Customs about expected arrivals and advising it of which consignments do not arrive. The reason behind that is that lorry drivers who smuggle into the country spirits on which UK duty has not been paid often book their load into a warehouse as a precaution in case they are stopped and questioned by Customs at the port. If they are stopped, they take their load legitimately to the warehouse, but if they get through without being stopped, they deliver their goods straight to the retailers. If criminals knew that repeated failure to turn up at a warehouse would attract suspicion, that smuggling method would be eliminated.

The Government estimate that the package of measures that the Scotch whisky industry proposes would reduce fraud by approximately £70 million a year and that tax stamps would lead to a reduction of around £160 million. Even if the Government's estimates are correct, tax stamps would save only £90 million more than the Scotch whisky industry's suggestions. Their estimate of the annual cost to the industry is £54 million on top of the one-off capital cost of £23 million. Even if all the estimates are correct, the amount of savings that can be expected is low. Of course, there is grave concern that they are far from correct.

So far, the Government have not attempted to estimate security, which worries the industry a great deal. Each tax stamp is a small piece of paper worth £5.48. The industry will therefore have to hold a large number of what are effectively £5 notes on its premises. Many bottling plants are on out-of-town industrial estates and they would have millions of pounds in £5 notes on their premises. The tax stamps are as good as cash to any thief who steals them. What sane company would store millions of pounds in £5 notes in a factory on an out-of-town industrial estate? The police are always telling us to put cash in the bank and not to leave it stored on premises, because of the costs of security. The insurance industry is reluctant to store cash, and insurance premiums to the whisky industry will rocket.

Stamps will create problems on the production line. The machinery that puts the stamp on the bottle is complex. Bottles will have to be monitored as they come off the production line to ensure that two stamps have not stuck together and been affixed to one bottle. Torn stamps will cause problems. Some bottles will inevitably get broken after the stamp has been affixed. Claiming back the costs of stamps on broken bottles and torn stamps will involve costly administrative procedures.

We do not know the scale of the problem that the Government are trying to solve, how effective their proposed solution will prove, or the full costs of the scheme. However, we know that great risks are involved. Should the Scotch whisky industry have to cut back its production because of costs, the outcome will be devastating for the economies of small rural communities such as those on Islay and Jura. I appeal to the Government to ditch clause 4 and not to proceed with tax stamps but to adopt the whisky industry's alternative package.