Examination of Witnesses (Questions 260
- 279)
WEDNESDAY 10 JANUARY 2001
MR ROB
HAYWARD, MR
RUSSELL SHARP,
MR BRIAN
STEWART AND
MR RICHARD
GIBB
260. But that is a problem in the country you
are targeting rather than a problem at source?
(Mr Gibb) Yes.
Chairman: We will move on to the next question
of excise duty.
Mr Welsh
261. You will be pleased to know there is an
All-Party Parliamentary Beer Club and in fact it is the largest
all-party group in this Parliament!
(Mr Gibb) I am wearing my tie!
Chairman: We are not all members of it!
Mr Welsh
262. I was a founder member so I should declare
an interest—I do not know if it is a declarable interest
but I will declare it anyway! With regard to excise duty, the
tax situation is of great concern to the industry. The taxes on
beer imposed by the UK Government are among the highest in Europe.
The memorandum from Customs and Excise shows that only Finland
and Ireland impose higher beer duties. Could you describe how
high rates of excise duty affect the industry? Are there any particular
impacts on its ability to compete against foreign companies?
(Mr Hayward) Mr Chairman, may I first of all take
the opportunity to thank you for your cordial welcome to me back
to this place. As the other Englishman sat round this table, I
am here to cover certain specific issues and allow my colleagues
to comment in general on the Scottish matters. My mind did go
back to the days when the Conservative Party had representatives
both in Scotland and in Wales and I tried to speak in a Welsh
Day Debate. As an MP for Bristol I was subjected to a far less
cordial welcome than I received here this morning, so I am appreciative
of that. Can I comment in relation to the overall question of
duties which you have raised, Mr Welsh, and that is that you have
had identified the stark contrast between the duties applicable
in most of Western Europe and ourselves. It causes a number of
problems, the most high profile one and the one on which I want
to comment is the whole issue of bootlegging. We are losing as
an industry—
Chairman: Could I stop you there because Mr
Swayne is going to be asking you about smuggling, so keep off
smuggling just now.
Mr Swayne
263. Let's get it all done in one.
(Mr Hayward) I will keep the first answer brief. There
is a stark contrast between the United Kingdom and most continental
countries. The net result is a very high level of illegal importing.
What we have seen over the years, and we have some very detailed
statistics which we will happily provide for the Committee, is
an ever greater involvement of criminality and criminal gangs.
That applies north of the border, in Scotland, and south of the
border. There is the supposition that the imports are concentrated
in the South East. Well, they are, but we have very clear statistical
evidence that large truckers haul into Glasgow and Edinburgh,
haul into Dundee. In fact Glasgow is one of the few places where
our statistics—which we share with Customs and Excise—increased
between 1999 and 2000. So it is a substantial problem for the
whole industry and is one that needs to be tackled, not solely
because it is a problem for the industry but because it is becoming
a growing problem for society.
Mr Welsh
264. I am about to give you a free rein. If
you could design a fair tax regime, what would it look like? If
you cannot resist temptation, go ahead!
(Mr Hayward) Perhaps I can start on that purely on
the beer side. We have just made our submission to the Chancellor
in relation to the forthcoming Budget and we have asked there
be a small, 2p, decrease in relation to duty per pint. The reason
it is specific, it is 2p, is that is duty and VAT, because obviously
you have a multiplier on top of duty, and that means it can in
some form be passed on to the consumer, because of course the
minimum size of a sale is half a pint. We believe that will both
benefit the industry overall and also reduce the element of bootlegging
and criminality, so it is a two-sided coin.
(Mr Stewart) We are not seeking harmonisation in terms
of duty levels. That is unrealistic and is not really what is
being looked for. We are looking to try and close the differential
between mainland Europe and the UK so that discourages this. The
other issue I would raise is that sometimes people forget, particularly
in the beer business, which is predominantly on-trade, the amount
of taxation which is collected over and above duty, because we
are a highly labour intensive business. We are not the condensed
spirits business, which takes a bottle of alcohol and distributes
it in a very tight format, we have to deal with kegs of beer,
we have to deal with the whole infrastructure associated with
that. So the duty penalty for us, or the taxation penalty for
us, should be seen as a whole. In Russell's case, he has £150,000
per employee in terms of total contributions, which is very high
indeed.
(Mr Hayward) In the United Kingdom the net take is
£2.8 billion currently for beer in duty alone. For spirits
it is in total £1.8 billion, and for whisky it is actually
only £600 million.
(Mr Sharp) You asked about the ideal world, and I
do not think we are unrealistic enough to say we want zero duty,
because we are responsible enough to know duties are necessary,
but maybe at a slightly lower level. One of the problems we have
is that since 1993 when the system of how duty was calculated
and collected changed, it has become more and more complex via
Customs and Excise. Currently at our brewery we employ two people
full-time actually just to do duty calculations. We also have
a brewery manager, a packaging manager, and a laboratory guy who
spends a third of his time doing analyses to suit the beer duty
calculations. The net effect of that is that it costs our little
company £50 or £60,000 a year to collect the excise
duty. I think the time has probably come—and I know we have
all been talking to Customs and Excise about this—for a
simplification of the system. I do not have any real problems
in calculating what the VAT payments are every quarter, and there
must be a similar system we could have based on that type of calculation
which would make it easier for us as an industry and save money.
If we could save some money, we could probably plough that money
back into marketing or some other spend.
265. The whisky industry claim that the high
UK tax rates simply encourage other governments to raise duty
in their own countries. Does this also apply to beer?
(Mr Gibb) I do not think so. The levels of high duty
are related to traditional and social issues.
266. The memorandum from the Brewers' and Licensed
Retailers' Association of Scotland stated that the pubs and hotel
sector employs 127,000 people in Scotland. In addition, they may
have a particular importance for rural communities, where the
pub is often a prime source of local employment and the centre
for the local community. Do you think Government policy pays sufficient
attention to the effects which excise duties have on the Scottish
economy, including local effects, or does it ignore these because
of the revenue it raises from spirits?
(Mr Gibb) All the studies we have done—and Rob
can, I suspect, add more on this—which are taken in a UK
context show that the pressures from duty and smuggling impact
most severely on the rural pub. It is the most sensitive to beer
volume, it is the one where the impact of alternative sources
of beer like from the back of somebody's van is most intense.
Certainly submissions we have made have looked at that very specifically.
The answer is, in Scotland, where the dispersion of the rural
pub is even greater than other places, that is a real issue. These
are in many cases marginal businesses, hampered by the impact
of the duty burden and, as we keep referring to, the regulatory
burden. So in both areas Government policy is threatening that
community.
(Mr Stewart) If you look at the environmental levy—and
I was trying to dig out the statistics and we will provide them
to you[6]—because
of the part-time nature of employment in pubs, you are going to
see a further burden on the retail outlet during the coming 12
months. To an extent, it comes back to this issue that people
are seeing the tax burden in one pocket and not seeing it across-the-board
in terms of the pressure on rural pubs. We have highlighted this
on a number of occasions and I think Scotland will suffer immeasurably
from that.
(Mr Hayward) I think, Mr Welsh, you made
the point it was not just pubs, we are talking here about hotels
and restaurants too, but there are many which are marginal operations.
The more you make available other sources of product which are
substantially cheaper, and do not give those outlets the opportunity
to reduce their costs or keep their costs static, the less viable
they become. That obviously applies in rural Scotland.
Chairman: This is the appropriate point to move
on to smuggling.
Mr Swayne
267. I think we have actually covered most of
the agenda but I have essentially three questions. Mr Hayward,
you said you had statistics which I understand quantify the illegal
trade?
(Mr Hayward) Yes[7].
268. Is it possible that the Committee could
have those statistics? Also, could you give us some note on how
you quantify that illegal trade given its nature, in other words,
the intelligence and some idea about how reliable those statistics
are? Secondly, do you have any idea of the extent to which that
trade is dealing with a youth alcohol problem? Thirdly, moving
on slightly, is the only effective action which you think can
be taken by Government to reduce the incentive, reducing the level
of duty, or are there other actions which the industry and the
Government could be taking?
(Mr Hayward) Perhaps I can take the last question
of the only action with the question of quantity, and then I will
come to the youth element. We started measuring in detail some
nine years ago the quantity that was coming through, and we did
careful research as to where the smuggled goods were coming through,
and all the indications are that the research we did nine years
ago remains relevant, ie it is overwhelmingly coming through the
South East ports, ie Dover, Folkestone and the like. We started
doing it—and the Labour members might appreciate this—because
the industry was in substantial dispute with the then Exchequer
because the Chancellor kept saying that it was not a problem and
we set about proving it was a substantial problem. In the end
Customs and Excise accepted that it was actually three times the
scale of what the Treasury was then saying it was. It reached
its peak about a year and a half, two years, ago, at about 1½
million pints a day. It started with beer and people have moved
on to things like whisky and wine. We are now down to something
above 1 million pints a day, and that indicates there are some
actions which can be taken. There is no question that the Government
has put in a lot of money in extra Customs and Excise officials
and they are in the process of bringing in scanners. They are
clearly concentrating primarily on tobacco and that is an element
of frustration to us, but tobacco is so much more of a problem
for the Treasury in terms of lost revenue, but it is having some
effect. We think there may be diversion to other ports now, and
we think there may be diversion to smaller vans—we have
seen a move away from the white van man into Mondeo estates, Volvo
estates, people movers and the like. We are clearly seeing, and
I do not expect to see the drop go much lower, the involvement
of criminal elements, and I will come back to that. It has got
greater and greater. How do we come to these detailed figures?
One, we do face-to-face enquiries—with the full knowledge
of Customs and Excise, and we exchange all the information with
them—twelve times a year, with people crossing both on the
Shuttle and on the ferries, asking them what they have purchased.
If you ask them in the right circumstances, they are much more
open than you might think they would be likely to be. We also
have covert operations, and I would prefer not to go into the
detail of how those covert operations are undertaken, but they
are undertaken five times a year, they are very detailed, they
have a consistency because they have now been running for nine
years. We measure all sorts of details—registrations, indications
of plates, et cetera—which is why we can say we know with
certainty there is greater involvement of criminality, criminal
gangs, because they have shifted away from ferries to the Shuttle
because it is quicker, you can turn the vehicles round, you drive
to a layby in Folkestone, off-load the Mondeo or Volvo estate,
stick it on a trucker and shunt it straight through to Glasgow.
You have to monitor it somewhere along the chain as well. So the
scale of the criminal operation is substantial but Customs and
Excise certainly accept our figures.
Customs and Excise only monitor the figures
once a year, so they rely fairly heavily on our figures, and they
have verified the details. Can I turn to the question you asked
about youths? We knew criminal elements were getting heavily involved.
We discussed this with Home Office ministers, we have been doing
that for several years, and now I think many of you, as Members
of Parliament, will acknowledge that in your sink estates—and
people will say there are not many sink estates in the New Forest
but there are in other places—people can buy off the back
of vans. What we wanted to do was try and identify the quantity
of this and the scale of it, so for the first time ever, just
before Christmas, again under Market Research Association rules,
we had a mass telephone process which we did not undertake, one
of the big, reputable research companies undertook, and they got
parental permission to interview children of 15, 16 and 17 confidentially.
What we found was, including all alcohol although we did break
the issue down into beer as well, depending on the nature of the
question asked, you got an answer rate of up to 50 per cent of
the children were answering, yes, they knew where they could get
beer or alcohol from houses, garages, cars and vans. This survey
did not take place in Scotland, we had to keep it to a limited
number and we did eight cities which included Cardiff, Sheffield
and Manchester. The other striking thing about that survey was
that in fact the problem was greater in the leafy suburbs than
it was in the sink estates in terms of knowing where to get illegal
product. We are talking here about 15 year olds. We are giving
these figures to the Home Office because we consider them to be
so significant. We have provided them also to Customs and Excise.
There is clear evidence of the involvement of criminal gangs marketing
alcohol to 15 year olds.
Chairman
269. What estimate do you have of the cost in
terms of jobs as a result of smuggling? What more can the Government
do? How effective is confiscation of vehicles, for example?
(Mr Hayward) Confiscation of vehicles is effective
only up to a point because one of the change of habits, and these
are the sorts of indications we get about the involvement of criminals,
is instead of having them spread over a period of time during
the day they now all go at the same time in the full knowledge
there are only so many Customs officials at Dover, so your chances
of being picked up are minuscule. They are all concentrated between
one and six o'clock, there is virtually no illegal trade before
one o'clock in the morning and it finishes at about six or 6.30.
They have done the full calculations. It is a very complicated
process. There are some things which you can tackle but it is
at the fringe. It is one of the reasons we think that a small
reduction in duty is actually quite key because the margins they
are operating to are relatively small and, therefore, if you take
a small amount off the top of that price you deter substantially
the criminal elements because they do have the transport costs,
they have to undercut the market, so the total margin between
British and French duty, 29p, if you take off 10p probably for
transport costs and shelling money out to the drivers, etc., and
then there is the undercutting cost, it is probably only about
10p that they can make as a margin. So if you can undercut that
on our products then it would have a fairly substantial contribution
not only to our industry but to society. On your specific question
about employment, we have done some projections, they are figures
that the Treasury do not accept and we are looking at these at
the moment to see if we can come back with some serious ones.
We know that there is a knock-on effect in terms of the employment
in pubs as well as breweries but being precise about it is a difficult
one. What we would say is that unlike other elements of the industry,
alcohol and tobacco, Customs and Excise accept with us that probably
only about 15 per cent of the product is re-exported, in other
words produced in this country, 85 per cent you are importing
from a Belgian or a French brewery. That is 85 per cent of the
production of the illegally imported product which is not creating
any form of British jobs, it is a straight loss to the economy,
a straight loss to the revenue.
270. Are we talking about hundreds or many thousands
of jobs?
(Mr Hayward) Thousands without any shadow of a doubt,
it is only a question of how many thousands.
Sir Robert Smith
271. Unfortunately three little things came
up there. One is with the young people, young people cannot buy
alcohol anywhere but illegally so I do not know whether you have
done a break down of how much of that is young people buying illegal
alcohol that is actually sourced in this country and how much
is buying it from elsewhere. The second one, given this talk about
brand loyalty, if it is an overseas brand that is being smuggled
in—this may be a red herring—is it substituting for
a brand that would have been imported anyway? The final question
is when we were on our visit to Glasgow, the other part of criminality
that came up there was actually exports that never make it out
of the country but are being diverted. They are bonded and should
be leaving the country but somewhere along the way they are hijacked
in a sense and are then sold, so you do not have even have to
cross the Channel for the criminality to avoid the duty.
(Mr Hayward) I will answer the third question and
ask my colleagues to comment on the question of brand loyalty.
This survey throws up questions for us as an industry because
it also highlights that 16 and 17 year olds can buy the product
illegally from pubs or off-licences and the like and we have got
to tackle that and they are issues on which we are in discussions
with Government in general because we all know that youngsters
buy alcohol. The really frightening figures here are the 15 year
old's knowledge of where they can get it through criminal sources.
We know that criminals do not let go of the people that they have
got hold of and it is the potential to take it on to drugs and
those sorts of things which we really are throwing up. I would
emphasise that although this is a Scottish Affairs Committee,
and I indicated that this survey was undertaken in England and
Wales, what was significant was the level of the problem was the
same in Manchester and Sheffield, which were the most northerly
cities, as in Maidstone where we did the surveys. Sorry, the third
element, you asked about brand loyalty.
272. It is a slight red herring.
(Mr Hayward) Export fraud. Because of the sheer scale
that we know comes in from abroad it is actually at a very, very
low level in our case because we are talking about a very bulky
product.
(Mr Stewart) The middle one on brand is price and
availability, not on brand.
273. The element of the criminality that deals
with the diverting of exports, in other words stuff produced in
this country for export that does not make it abroad and therefore
has not had duty paid, is there any barrier to you marketing products
for export only?
(Mr Stewart) Usually they are labelled "for export".
(Mr Gibb) Apart from anything else, in this context
you have got an EU problem in terms of goods that are available
for sale in any part of the EU are valid anyway. Were it non-EU
imports, which I know is an issue in the context of tobacco where
quite a lot of it comes outwith the EU, then that is a much more
practical solution. We are simply talking about cross-EU products
so effectively anything is legit.
274. The point that was made to us in Glasgow
was that beer produced in this country for export was put on a
lorry, sealed up, and therefore did not have any duty paid on
it, the lorry then went off, the paperwork got changed and the
beer was sold in this country and never made it out of the country.
(Mr Gibb) There is an element of that and there is
a fraud committee working with HMCE and the BLRA.
(Mr Hayward) It is less of a problem for ourselves
than it is for possibly the whisky industry. Can I just make a
comment in relation to marking things for export? I represent
both pub companies and also the brewers both large and small.
For the large companies that is far less of a problem than it
is for the small ones. For a small company they have very limited
runs. If you start implementing yet further runs because you have
got to label things in different ways then you lose the flexibility
that a small producer would normally have to an even greater extent.
(Mr Stewart) The reduction we are looking for we believe
will come back in terms of the duties to the Revenue through increased
volume consumed in the UK. It is Rob's job to prove that to the
Treasury. Needless to say the Treasury are reluctant to accept
that at this point in time but that is the area of activity that
we are pressing hardest upon because we do not believe it is just
a given from the Treasury.
Chairman: It may be worth trying for one year
anyway. We only have about three questions left. We will move
on to soft drinks.
Mr Brown
275. Before I ask the question on soft drinks,
I actually held an adjournment debate some weeks ago on the issue
and you have mentioned about youngsters and alcohol and I can
tell you it is ten and eleven year olds who are into tobacco products,
that is their starting point and they are already there. To move
on to soft drinks, the Association has said that it aims to be
"a major contributor to the economics and social well-being
of Scotland". One of its real objectives is to "foster
co-operation between its members on matters pertaining to the
brewing industry and licensed trade in Scotland." Quite simply,
to what extent does the licensed trade "co-operate"
in order to sustain the high price of soft drinks in pubs?
(Mr Stewart) It does not. It goes back to the characteristics
of the free trade in Scotland. It is set by individual retailers
whatever the price of a soft drink is. Indeed, it is no different
from beers or wines and spirits. It is very much an individual
issue. There is no large enough group available to dictate what
the retail price of soft drinks should be.
276. Could I add on the back of that, do you
find it worrying at all that here we are in 2001, we have just
come through a festive season when we have tried to encourage
people not to drink and drive, and I think people do act sensibly
in this country today where if you have a car load of people one
of them will decide it is their turn, and you actually find that
soft drinks are more expensive than alcohol in some pubs? Do you
find that a worrying aspect?
(Mr Gibb) If the price becomes disproportionate then
it is clearly a worrying aspect but in the end the pricing of
beverages in a pub is about the total cost estimate of the pub
of which the in-cost of the beverage is relatively low. In that
sense the pricing is about a set of cost factors. If we get to
a point at which the price is disproportionate then, yes, that
is a worrying factor. People are paying to be in the pub, to have
those amenities, and they will pay it across all the elements
that are there.
(Mr Hayward) Can I make an observation in general
about it. Mr Brown, I did read the adjournment debate and appreciated
many of your comments. In terms of pub pricing there are a number
chains who have now chosen to alter their price structure. The
other observation I would make is that it is quite interesting
that actually the product that is growing most rapidly along with
food is soft drinks in pubs which may result in a variation in
price structures anyway because, as has already been indicated,
ten or 15 years ago people solely went in there to drink beer
or to drink whisky or whatever. People now go into a pub or a
bar for a very different experience and if the pub owner does
not change accordingly people will actually go elsewhere. On soft
drinks it is quite marked, the increase in sales of soft drinks
in most pubs and bars nowadays.
Mr Clarke
277. It must be more profitable for them to
do that. It is robbery without violence. Seriously. You go into
a hotel and a dash of cordial in your drink, and you are better
buying a bottle of whisky. You are all laughing but it is true.
The big conglomerates are involved in this and it is a conspiracy
against the customer. One of the reasons people are drinking at
home is they are buying soft drinks or anything else and drinking
it at home because they say "what?" for a Coca-Cola
and sometimes it is not Coca-Cola but some Coca-Cola make-up.
(Mr Hayward) I would make the observation that the
circumstances are changing. People are clearly conscious of the
price of soft drinks because they can buy it, and regularly do
buy it, in supermarkets. People generally do not work out how
much the peas that are on their plate in the same hotel actually
cost when they are having their meal.
Mr Clarke: They do where I come from.
Mr Brown
278. I used the word "co-operate"
not "conspiracy".
(Mr Stewart) There is no co-operation, it is completely
and utterly unmanageable.
Chairman
279. The final two questions. It was mentioned
several times this morning that the structure of pub ownership
in Scotland is different from that in England. Can you very briefly
explain how it differs and why this should be?
(Mr Stewart) I think it is history. It goes back very
many years when there was a very vibrant, free trade market with
individual ownership in Scotland. We had more pubs in Scotland
ten years ago under direct ownership than we do today. I think
it is history. The English brewers bought up pub estates and we
did not do that in Scotland. We have a history of exporting. S&N
exported to India, England, around the world in the last century
and that was very outward looking at that time. That is the real
reason as to why we have a very different structure in Scotland.
6 See evidence, pp 103-104. Back
7
See evidence, pp 94-103. Back
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