Clause 3 - Duty on beverages made with spirits

Finance Bill – in a Public Bill Committee at 12:15 pm on 14th May 2002.

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Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 12:15 pm, 14th May 2002

I beg to move amendment No. 1, in page 2, line 18, leave out subsection (1) and insert—

'(1) The Treasury shall lay before Parliament on or before 31st December 2002 a report on the operation of duties on alcoholic beverages that shall include—

(a) information about the market in lower-strength alcoholic beverages;

(b) an estimate of the impact on consumption of the rates of duty on beer, cider, wine and spirits in comparison with the rates of duty on those beverages falling within the provisions of section 1(9) of the Alcoholic Liquor Duties Act 1979;

(c) a summary of any representations received by the Treasury after the day on which this Act is passed relating to section 1(9) of the Alcoholic Liquor Duties Act 1979.'.

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

With this we may take amendment No. 2, in page 10, line 27, leave out column 5.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

The purpose of the amendment is to draw out the Treasury and the Minister further on this issue. Unlike on most occasions when there is a dramatic change in a duty regime, there was no consultation with the industry, as I understand it, before the Budget, and the Chancellor's Budget statement came out of the blue. Let us remind ourselves of what the Chancellor said. He said:

''From 28 April, premium package coolers which contain spirits not wine will be taxed not as low-alcohol wines, but as they should always have been, at the same rate as spirits.''—[Official Report, 17 April 2002; Vol. 383, c. 584.]

If the Chancellor believed that premium package coolers should always have been charged at the same rate as spirits, why did he not divulge that view a little earlier? After all, he has been Chancellor for five years and he had time before he came to office to pledge that his Government would do that as a revenue-raising measure; but not a bit of it.

It is also significant that in the Budget statement the Chancellor devoted all of three and a half lines in Hansard to the extra tax on coolers, which will generate £170 million of extra revenue for the Exchequer this year. That was half the lineage that he was prepared to devote to small beer, which will cost the Exchequer a mere £10 million this year. That is another example of the way in which the Chancellor, in his Budget statement, tends to place an enormous amount of emphasis on areas where he is reducing taxes in a gimmicky way, but pays the minimum amount of attention to areas where he is imposing a sharp increase in tax. Indeed, this is a very sharp increase in tax—£175 million a year. Later, we shall discuss whether it can be justified.

I want to draw the Committee's attention to the background to the issue. It is more correct to refer to these spirit coolers as flavoured alcoholic beverages. I understand that that is the modern terminology. I know that the Financial Secretary always likes to be as modern as possible. If he wants to be as modern as possible, I suggest that he begins to refer to these drinks as FABs—flavoured alcoholic beverages. The origin of the tax was the concession on the UK production and importation of coolers, which was introduced in October 1988. It was intended to

encourage the development of the market for lower strength alcoholic drinks. The concession achieves its objectives, and on that basis one company, Bacardi-Martini, has made a sustained investment of £10 million, which has created 200 new jobs.

I know Bacardi-Martini because it used to be in my constituency when I represented Southampton, Itchen, which is now represented by the Minister for Police, Courts and Drugs. Last year, just before the general election, he opened the £10 million investment in the production line at Bacardi-Martini. At the time, the local press did not report the Chancellor's view that duty should always have been charged on those products at the same rate as spirits, and the Minister for Police, Courts and Drugs was full of enthusiasm for the new production line and the new investment in innovative products.

Bacardi-Martini has launched a number of new products designed to compete directly with bottled beers, lagers and ciders. Clause 3 would distort the market and remove the coolers industry's ability to compete, which it has done since 1995. It has been very successful, and I did not realise that it was part of the Government's policy to penalise entrepreneurial success, which is what they seem to be doing in clause 3. The concession is being removed without any consultation with the industry, which has continued to invest on the assumption that the market would be stable but now finds that it has been totally mislead.

The implications of what has happened go wider than that particular industry, important as it is. Investment in innovative drinks is something that we should encourage in this country. If industry finds that it invests and suddenly, without any advance warning, the Government come along and cut the ground away from under it, it is right to be concerned.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Does my hon. Friend agree that that is analogous to the 10 per cent. additional oil tax after a pilot scheme had encouraged smaller companies in particular to commit to developing new fields in the North sea? That tax was similarly sprung on them without consultation.

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

Order. We are beginning to stray a little wide of amendments Nos. 1 and 2. I have always taken the view that it is possible to have a clause stand part debate at either the start or the end of a clause, but not both. We appear to be heading down the former road.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I thank you for your tolerance, Mr. Gale.

Specifically, the amendments would put the Government back in the position in which they should originally have been. If they intend to change the taxation regime for a particular product line, they should consult the industry and have proper information available on which to base their decisions. Amendment No. 1 states:

''The Treasury shall lay before Parliament on or before 31st December 2002 a report on the operation of duties on alcoholic beverages that shall include—

(a) information about the market in lower-strength alcoholic beverages;

(b) an estimate of the impact on consumption of the rates of duty on beer, cider, wine and spirits in comparison with the rates of duty on those beverages falling within the provisions of section 1(9) of the Alcoholic Liquor Duties Act 1979;

(c) a summary of any representations received by the Treasury after the day on which this Act is passed relating to section 1(9) of the Alcoholic Liquor Duties Act 1979.'.''

If the industry had had a chance to make representations before the Budget, they would have included those to which I have referred from Bacardi-Martini on the proposal's impact on its investment and the damage that it would do to its confidence in the Government.

A firm called Halewood has recently spent £2.5 million on two new bottling plants; not all of that was its own money. It received Government grant—regional selective assistance—from the Department of Trade and Industry because it is in an area of high unemployment in Liverpool. It received Government subsidies to invest in plants to bottle the very coolers to which the Government now seem to be cold. GBL International is likely to postpone the purchase of an additional bottling line at the Mansfield brewery. It currently employs 80 people and was planning to expand up to 200. The Bacardi-Martini group has around 65 per cent. of its business in those products, which are very successful.

The result of the announcement being made without consultation is that the industry is in a state of flux. Amendment No. 2 would prevent the clause from coming into effect for the time being and until there has been some consultation.

I shall give an example to explain the state of flux. Each recipe for flavoured alcoholic beverages must be approved by Customs and Excise before it can be put into production. Following the Budget, producers asked what recipes can be authorised, but as of 13 May Customs and Excise has been unable to give clear guidelines and agreement on new recipe formulations. That shows that the impact of the measure has not been thought through by Customs and Excise. Recipe experts, monitors and approvers are sitting on their hands not knowing what they can or cannot do. Meanwhile, the industry is waiting for a lead. Had there been proper prior consultation, the industry would not be in that state of flux.

Equally important, production will be severely affected, which will have an impact on jobs, consumers and exports. The Government's justification for the measure is that the price of coolers in the retail trade and pubs has increased by 60p during the past two years and that that shows that there is sufficient price flexibility to absorb a significant increase—more than 60 per cent.—in the rate of duty. I have been told that it is impossible for the industry to find out from Customs and the Government where they obtained the information that coolers have increased in price by 60p in the past two years. I was told that the price had risen by around 20p rather than 60p, and I hope that the Financial Secretary can explain the basis of that assertion, which the

Government are using to justify the introduction of the measure.

I should also be grateful if the Minister would explain why the Government think it reasonable to single out those products instead of others. We had part of that debate under clause 2 when we discussed cider. Last Friday, I carried out something of a survey in the Christchurch Conservative club.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

It was a very representative sample. It so happens that the favourite tipple of none other than the Secretary of the Christchurch Conservative club, who is certainly no teenager, is WKD, a vodka-based iron brew with a proof level of 5.5 per cent. In the Christchurch Conservative club, it is available at £1.65 a bottle. As a result of the Chancellor's measures, it is inevitable that that price will increase by about 20p.

It seems, however, that the Government have information suggesting that in some other parts of the retail trade, the cost of a WKD, a Bacardi Breezer, a Reef or an Archers Aqua might be more of the order of £2.50. We know that in clubs—perhaps less Conservative than the one that I referred to—drinks tend to be served at prices that are nice round figures, so that the people serving do not have too much trouble with the change. They are normally priced at £2, £2.50, £3 and so on. The consequence of the change in duty that the Government propose is that, in an average club, the price of one of those flavoured alcoholic beverages will increase from about £2.50 to £2.70. It might even be rounded up to £3. The drinks will be unable to compete on a level playing field with others that are priced at £2.50 but have an equal or higher alcoholic content. How can that be fair? Surely it is thoroughly unreasonable.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East

Obviously, the hon. Gentleman is talking very competently about prices, but does he not realise that many cooler drinks are sold through the vehicle of happy hours? I do not know what happens at his Conservative club; I know that his is not a happy party. The cost of the coolers drunk by many people, including students, is reduced considerably. The increase in tax will have very little effect on the uptake, given that most such drinks are retailed to a younger market, through such conventions, on student nights out on a Friday and Saturday.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

The hon. Gentleman, who represents a university town, will know all about that market. I can certainly tell him that in Christchurch Conservative club, every hour is a happy hour. [Laughter.] The hon. Gentleman asserts that the measure will make no difference to take-up. How can he be so sure? The amendment seeks to make the information available so that a rational person such as the hon. Gentleman is in a position to say whether there will be any difference to the take-up.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East

Having previously been involved in academic life and invited by many students to their evenings out, let me point out that these are fashion drinks. Obviously, they are not bridled by advertising, as is the case with smoking, and the market for them is limitless. They are a fashion statement rather than a drink. That is where the crux of the argument lies.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I am not quite sure where that takes us. The hon. Gentleman says that the drinks are fashionable, and I accept that many members of the Conservative club in Christchurch are fashionable. The Government are justifying a sharp increase in duty on the basis—among others—that the chief medical officer has expressed concern about the association of coolers with binge drinking among young people. There seems to be no evidence of that whatever. As I said in the previous debate, the person in charge of the Portman Group, a highly respected body, has said that the popular drinks among young people—particularly under-age drinkers—are the traditional beers, ciders and lagers and not the flavoured drinks that we are debating.

We do not have the information, and I shall allow other people to participate in this important debate. One of the biggest concerns is that the Red Book says that there will be a yield of £170 million this year as a result of the change in duty. Even that figure does not seem to be substantiated by any discussion between the industry and Customs and Excise. I should be interested to hear from the Minister how he justifies that figure, because it implies that Customs and Excise thinks that the present market in such products is much larger than it is, and that it expects the market to expand even more than the most optimistic producers think that it will.

In conclusion, I ask the Government to think again about the increase. It might have seemed an easy, last-minute initiative for the Chancellor, who suddenly found that he needed to raise even more money and wanted to do it in a way that would not be seen to impact too heavily on people. He was able to announce £10 million for beer drinkers at the time of the World cup, but at the same time he announced an increase of anything between 20p and 50p on the price of a flavoured alcoholic beverage for someone who wishes to use such a beverage to toast the England team. How can that be justified? The amendments give the Financial Secretary the opportunity to explain and justify the Chancellor's action. He has a tough task on his hands, but we look forward to hearing what he has to say.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

Before discussing the amendments, I should declare an interest. I am a member of the Canton Labour club in my constituency of Cardiff, West, where one can buy those drinks at a much lower price than in the Christchurch Conservative club. At the Canton Labour club, there would not be the sort of scam that the hon. Gentleman described as occurring at the Christchurch Conservative club, where if there were an increase in tax of 20p, the price of the drink in question would increase by 50p. It would not sell Archers Aqua, named after the former chairman of the Conservative party. He describes the sort of scam one might expect in the sale of a drink called Archers Aqua sold in the Christchurch Conservative club.

I want to speak against the amendments because the current treatment of such drinks represents a tax anomaly. One reason for the huge expansion in the market is that the discriminatory, favourable tax treatment of those drinks has allowed manufactures to increase prices significantly and still enjoy a massive

growth in demand. Demand for the drinks has doubled over the past few years at a time when manufactures have been able to raise prices. Even if the hon. Gentleman did not accept the Treasury's figure of 60 per cent., which he mentioned earlier, the manufacturers are quoting a figure of 20 per cent. during the past few years, which is a figure well ahead of inflation, suggesting that the products are under-taxed.

I read carefully the representations that hon. Members have received from the industry, particularly the one from Bacardi-Martini Ltd., from which the hon. Gentleman quoted. After reading the letter, I sent it to a few of my constituents who teach economics in secondary schools as a useful tool for illustrating taxation and other economic fallacies. The letter states:

''We will have no option but to pass this cost to the consumer.''

Anyone who knows anything about the matter knows that that is absolute nonsense. Earlier, the right hon. Member for Fylde mentioned that a reduction in an excise duty—a change in the opposite direction—would not necessarily be wholly passed on to the consumer. An increase will not be wholly passed on, either. For that to happen, there would have to be complete inelasticity of demand and, as we know, that is not the case with such products. Some of the cost may be passed on, but it is not true that all of it will be passed on.

There is clear evidence that change in demand for the products is a movement not along the demand curve but of the demand curve. It has shifted to the right during the past few years because of changes in taste and fashion, and because of heavy advertising. As my hon. Friend the Member for Dundee, East said, the products are fashionable. There has been a huge expansion of demand for them, as a result not of reductions in price but of changes in fashion and drinking, particularly among young people. For the Opposition to say that such drinks are principally enjoyed by the rather elderly members of the Christchurch Conservative party—I apologise to them if they are not elderly, but I know that the average age of Conservative party members is much higher than that of the other parties represented in the House—and not by young people is absolute nonsense. The products are aimed at young people. Beers and ciders with a high alcohol content are not used in binge drinking because one would not last very long if they tried to binge drink with them. It would not be much of a binge.

Photo of Ann McKechin Ann McKechin Labour, Glasgow Maryhill 12:45 pm, 14th May 2002

Is not it the case that those drinks, unlike cider and beer, are specifically targeted at young female drinkers? There has been a worrying increase in alcohol addiction among young women and binge drinking among women in recent years.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

I am sure that my hon. Friend is right, and we should be concerned about that increase. To take the Portman Group's carefully worded claim

that the majority of drinking among young people involves consumption of beer and alcohol and to say, therefore, that we should ignore a doubling in the demand and consumption of lower-strength alcoholic drinks by young people is to support the argument of the industry and the Opposition without addressing the facts. The facts are that, although it may still be the case that the majority of alcohol consumption by young people is of beer and cider, the huge increase in consumption is due to lower-strength alcoholic beverages.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

Does the hon. Gentleman not accept that, in its own right, the measure in the Bill is a one-off? Were it to come as part of a strategy to examine the consumption of different types of alcohol and to consider ways of adjusting the excise structure to tackle the problem of binge drinking across the whole range of alcohols, particularly strong alcohols, there would be some coherence in the proposal. For example, the measure is entirely incompatible with the reduction in duty on strong cider, and it appears to have no strategic dimension to it at all, except for raising revenue from a particular part of the market.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

The measure is evidence based. There is a huge amount of evidence of the increase in consumption of such products. There has been no similar rate of increase in the consumption of cider. As I said earlier, binge-drinking problems are not caused by strong cider or drinks with a high alcohol content, but by lower-alcohol products, which one can consume for a longer period of time. There may be a case for reviewing the alcohol content of some beers and ciders, and I would be willing to entertain that proposition, but there is an evidence-based reason for putting right the anomaly of treating these products like beer and cider instead of what they are—spirit-based products.

I welcome the clause and urge the Committee to oppose the amendments. This is an important step, first, towards rectifying an anomaly and, secondly, towards dealing with what is becoming a significant problem, as evidenced by the doubling of consumption in recent years.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I support these modest amendments, which simply ask the Government to think again and to undertake the consultation that they should have undertaken before bringing the measures before the House. Many other aspects of the Bill have been widely consulted on. Indeed, that is something on which the tax professions have commented positively in regard to the Bill. It is a great shame that, when the Government are embarking on a major policy change, they have not undertaken adequate consultation.

The Committee must be aware that it is a major change in policy. The duty on this type of drink is being increased by more than 60 per cent., a huge one-off increase by any standards. It goes against a previous cross-party agreement—that low alcoholic beverages would have this concessionary rate. If the Government are to object to such consultation, they must say why. They may argue that the announcement had to be made clear on Budget

day because it might have affected the share prices of the companies involved. I doubt that the Government will make that argument, because it is my understanding that it would have had a marginal or neutral effect on the share price. No Budget secrecy issue related to the tax, so the Government could have consulted, had they chosen to do so.

The other reason why I am moved towards supporting the amendments is that the evidence that we have received from Bacardi-Martini Ltd. and the Wine & Spirit Association seems to contradict the limited evidence provided by the Government in the notes on clauses and the Budget itself. When there is a conflict of evidence—quite a serious conflict in some cases—we are justified in asking the Government to think again.

Let me give the Committee an indication of two of those conflicts. The first relates to the change in retail price of these products over recent years. In the notes on clauses the Government say that there has been a 60p increase in the past two years. We have seen evidence from ACNielsen that the increase is a third of that—20p. Clearly, that relates to the Government's justification for the measure, because the notes on clauses say:

''Tax as a proportion of the retail price is now lower for spirit-based designer drinks than for any other type of alcoholic drink''.

If that is the Government's justification, but it is based on incorrect evidence, they need to think again. Therefore, I hope that the Financial Secretary will tell the Committee where the estimate of 60p comes from, because it flies in the face of the evidence that Committee members have been sent, which I am told comes from independent research. The Government have a case to make.

That is not to say that, if the Government went through that consultation exercise and came back to the House, I representing the Liberal Democrats and, I am sure, the hon. Member for Christchurch representing the Conservatives would be against such a move. If the industry has been widely consulted and the evidence exists, there may be a case—the case put by the hon. Member for Cardiff, West (Mr. Brennan). The concession may have resulted in this class of drink being over-consumed relative to other classes of drinks, leading to binge drinking and antisocial behaviour. If so, this may be one of the measures that we should take. I hope that we shall take it with a range of other measures, because other hon. Members who have had cause to investigate antisocial behaviour in their constituencies will have noticed that it has many causes, one of which is the price of alcoholic drinks. In my constituency, I have seen examples of retailers not acting responsibly by allowing people to purchase huge amounts of alcohol that are clearly intended for binge drinking, which leads to antisocial behaviour. In the last Parliament, new legislation was introduced to enable trading standards departments such as that at Kingston council to investigate disreputable retailers who sell to under-age drinkers. We need to pursue that type of policy to crack down on antisocial behaviour. The Government's policy might

be well coupled with that, but we need to see the debate in a wider context.

We also need to consider licensing practices, whether in relation to pubs or off-licences, to make sure that we crack down on underage drinking, which, and let us make no bones about it, is a major problem. The question is whether we should allow the Government to introduce a measure that conflicts with the evidence. On antisocial behaviour, for example, we have heard evidence from the Portman Group, which says that many problems attributed to that class of drinks have decreased because certain parts of the alcopops market have reduced. Some initial experiments in that market were seen to cause problems and have therefore finished. If the industry has acted responsibility, it would seem particularly odd to penalise it.

We need evidence such as that from the chief medical officer, and we need the Government to go away and look at evidence on price, social effects and health. As is proposed in the amendments, they should come back to the House with a proper report to allow us to make a decision while being better informed than we currently are.

Photo of Michael Jack Michael Jack Conservative, Fylde

The amendment is a not-unreasonable request for the Treasury to lay before Parliament information to justify a tax change. I was struck by an interesting sentence in paragraph 5 of the explanatory notes on clause 3:

''Tax as a proportion of the retail price is now lower for spirit-based designer drinks than for any other type of alcoholic drink, in both the on and off-trades.''

That caught my eye because it seems to move us to a basis for determining tax on alcoholic beverages that is equivalent to the deemed taxable potential of a particular product. I am intrigued by that because it opens up—I will not trespass into this too much, Mr. Gale—a very interesting new philosophy for taxation.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

May I put this interesting point to my right hon. Friend: a gin and tonic might be described as a FAB. It is gin mixed with various other non-alcoholic groups. If I understand FABs, that is exactly what they are. The point needs to be made that the tax on the spirit element should be in accordance with the tax on all other spirits; that which is not a spirit should not be taxable.

Photo of Michael Jack Michael Jack Conservative, Fylde

My hon. Friend leaps ahead with the logic that I was beginning to expound. My thought process triggered his excellent piece of analysis.

I am intrigued to know whether there is a new philosophy based on taxable potential. If the Treasury and Customs and Excise are to spend their time busily looking at retail prices, I might equally ask that the information that we seek in amendment No. 1 should also reflect the fact that what goes up can come down. If, as the explanatory notes state, the taxation principle is related to retail prices, we are surely moving into an interesting era as far as spirit taxation is concerned. There may be interesting variations about which the Financial Secretary would like to tell us.

That triggers a second line of inquiry: if retail prices are being observed, for how long will the Treasury go before it revisits that territory?

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.