Select Committee on Scottish Affairs Minutes of Evidence

Memorandum from the Gin and Vodka Association of Great Britain


Contribution to the Economy

  More than 2,000 people directly employed.

  Supports a further 8,000 jobs across the UK.

  Together with Scotch whisky, supports 10 per cent of agriculture jobs in Scotland and provides work for one in every 54 Scottish jobs.

Growth in Production in Scotland

  Gin and vodka are now the largest sector in the UK spirits market.

  Vodka is the fastest growing category of major spirit drink in the UK.

  Over 75 per cent of UK gin and vodka now produced in Scotland.

  Prime example of relocation to Scotland to improve cost of output.

  Relocation paid by export earnings, not from returns from UK market.

Cumulative Burden of Taxation and Regulation

  Historical duty discrimination against spirits compared to other alcohol drinks.

  Government standstill on spirits duty acknowledged this but only a step.

  Duty already at point of tax maximisation.

  Other countries do not discriminate against their major indigenous industry.

  Recommendations: Support for further standstill to reduce duty differential,

Reduce net cost to industry of Climate Change Levy.

Exports and Trade Barriers

  Annual exports of £200 million to more than 200 markets worldwide.

  Exports up by 50 per cent compared to 1995.

  Discriminatory taxation against gin and vodka particularly in Canada, China, Czech Republic, India, Mexico, New Zealand, Poland, Romania, Russia and Turkey.

  Recommendation: Seek Government to apply pressure on Accession countries to remove barriers and import tariffs prior to joining EU.


  1.  The main objective Gin and Vodka Association is to represent, promote and protect the UK Gin and Vodka industry. The Association has 24 member companies. These range from large multinational companies (MNCs) in the FTSE 100—which include the biggest spirits companies in the world—to small members with less than 12 employees in the whole production process. The Association covers over 95 per cent of UK gin and vodka production, with our members accounting for 76 brands. Although members' sites stretch from Plymouth to Invergordon, a major relocation of facilities now means that some 75 per cent of UK gin and vodka is produced in Scotland.

  2.  Noting the Committee's responsibility for reserved issues, the active interest of Westminster in the affairs of the spirits industry remains crucial given that two of the major issues which impact on the industry, excise duty and international trade, continue to be the responsibility of the Westminster Parliament. The Gin and Vodka Association therefore welcomes the Committee's inquiry, and the opportunity to provide evidence to it.


  3.  Domestic sales of gin and vodka now account for the largest sector in the UK spirits market. Seventy per cent of UK produced gin is exported and rather less of vodka. In addition, UK-owned companies produce over twice as much overseas—150 million litres—from which earnings are repatriated. Our members contributed £700 million in UK excise and VAT in 1999.

  4.  Employment and Social Affairs. The gin and vodka sector is a major employer with 2,000 directly and 8,000 indirectly. The spirits industry as a whole generates employment—direct and indirect—for over 60,000 people. The industry has actively participated in Government employment initiatives, Social affairs programmes and in the promotion of its Sensible Drinking Message. The Association supports the industry's self-regulation of promotion and advertising.

  5.  Good Practice: Improving Industrial Clusters and Refocusing. The Government has placed much emphasis on the development of industrial clusters as a way of maximising UK international competitiveness. Already the spirits sector has done much in this direction in Scotland, where we have a classic example of an industrial cluster with a well-developed network of local suppliers. At the same time, many of our member companies have refocused their activities and rebuilt their core activities around the successful end of the spirits market. This refocusing has met the pace of change and innovation.

  6.  Growth in Production of Gin and Vodka in Scotland. Extra investment has now improved this rationalisation further in our major companies. A major relocation of facilities has recently been completed to Scotland. This means that some 75 per cent of UK gin and vodka now comes off the bottling lines in Scotland.

  7.  Contribution to the Scottish Economy. Looking at the overall spirits industry in Scotland, where it supports some 40,000 jobs, one in 10 of agricultural jobs are already supported by the spirits industry.[1] The gin and vodka sector's impact in Scotland has increased this year due to the restructuring outlined above. But this does not mean that our sector is restricted to the main industrial belt. For example, one producer has expanded his employment in central Ayrshire where the coalmines have declined and agriculture is hard pressed.

  8.  The Rural Economy. The UK makes over 45 million litres of grain neutral alcohol per year for gin and vodka. Last year, this required 130,000 tonnes of wheat—which in turn meant that nearly 50,000 acres of UK arable was connected to the non-whisky trade.


Overall Fiscal Environment

  9.  The UK gin and vodka industry is a large export earner worth over £180 million. The Association was pleased that the Chancellor made the point in his 1999 Budget speech that it will be even more important to hold to our course of stability in the UK when there is a background of uncertainties elsewhere in the world. Gin and Vodka have certainly experienced these difficulties. But, much as we desire stability, the fact is that our home market has been far from robust in recent years, and it is being disadvantaged by the tax system imposed by our home country. Three examples illustrate this:

    —  Funding of restructuring of industry. The major developments in our industry, notably the restructuring in Scotland, have been funded largely from export performance and not from the much more limited returns in UK.

    —  Cumulative Burden of Taxation and Regulation. Taxation changes in 1999 are creating additional costs. These especially disadvantage our smaller UK based companies when compared to their continental counterparts. However, the major concern is the discrimination against our products due to excise duty in favour of other drinks. This is covered further below, as is the impact of the climate change levy. Additionally, the better allowances and reductions offered to our competitors elsewhere, still make the "effective" rate of UK Corporation tax disadvantageous—notably if compared to Holland, Belgium, Ireland and USA.

    —  Major companies are now producing gin and vodka elsewhere. The fastest growing London gin in the world is being produced in Poland. The contract for new premium brand vodka has gone to Holland. A further company has acquired a distillery in Romania. Due to the loss of export refunds, one company is considering sourcing cereals from outside the EU, and another is considering moving part of its production overseas. Additionally, imports of French produced vodka have increased 50 per cent in the last year.

    —  Foreign Subsidies. Gin and vodka are produced from neutral alcohol. At least 65 per cent of neutral alcohol traded on the world market originates from countries that subsidise their domestic production. This subsidy exceeds the fixed costs of production in these countries, providing significant competitive advantage against unsubsidised UK alcohol manufacturers.


  10.  Discrimination. Quite simply, the actual rates applied to three typical pub servings all containing the same amount of alcohol are 27.38p for spirits, but only 19.30p for wine and 16.65p for beer. Nearly 70 per cent of the off-the-shelf price of a bottle of gin or vodka is tax. When comparing UK rates with those in other EU countries, only Sweden, Finland and Denmark have higher rates on spirits, and all three have government reviews in hand. It is inconceivable that wine-producing countries such as France would tax their own indigenous industry in such a discriminatory manner.

  11.  Duty Standstill. The Association has much appreciated the duty freeze in recent UK Budgets that have recognised this discrimination and begun to rectify it. It is fully realised that the Chancellor can only adjust such taxation over time, but we are now seeking the support of the Scottish Affairs Select Committee to make representations to further reduce this distortion.

  12.  Impact of Tax. In brief, the higher the duty, the higher the price, and the greater its price sensitivity. Two major studies have been made available recently. The Institute of Fiscal Studies[2] confirmed last year that it cannot be rejected that the current rate of tax is at the revenue-maximising rate, implying that an increase in duty on spirits is likely to decrease tax revenue. Given this result, and the bias against spirits in the amount of duty imposed per unit of alcohol when compared with other types of alcohol, the IFS reports that there may be a case for not increasing the tax rate on spirits any further if the Chancellor does not want to lose revenue. Even more important due to its sophisticated modelling, is the second study by Professor Chambers (University of Essex) for HMC&E. This gave robust results for spirits and confirmed that they are more price sensitive than other alcohol drinks and are all but at the point of revenue maximisation—especially if the bracket of error is included.

  13.  Recommendation for Action. Both studies lead, therefore, to an important deduction. An increase in taxation may cause a reduction in resultant tax revenue. We urge the Committee to press this point with the Treasury, and, on behalf of the industry, to make the parallel point that any increase in taxation may cause a reduction in spirits sales that will severely hit the home base of a major UK exporting industry.


  14.  The European Commission has at last started a long overdue review of the minimum excise rates that Member States can charge on alcohol drinks in the EU. This is due to report in Spring 2001. This Directive was in itself a disappointment after states could not agree on either duty ceilings or even targets. As a result, discriminatory taxation was allowed to continue against spirits, with the majority of the wine producing countries imposing no tax at all on wines. Additionally, major tax differentials between countries—such as that between Sweden and Denmark, and UK and France—have been allowed to persist, albeit that these differences in rates are self-evidently the prime cause of illegal production, smuggling, fraud and cross border shopping.

  15.  Recommendation for action. The Association recognises that completion of the single market and total harmonisation of duties is unlikely to be achievable in the short-medium term. But we will be urging the Commission to seek reductions in excessive taxation and major areas of differential; and not to apply revalorisation in line with inflation as this would be discriminatory against spirits in the Mediterranean states that apply no duty on wine. Although the UK government has already indicated that it would like to see a narrowing of the duty discrimination contained within the EU minimum rates structure, we seek the Committee's support.


  16.  Our companies support the aims of the Kyoto Summit. Many have already taken impressive measures over several years to improve their energy performance, including using renewable energy sources and combined heat and power. The Association appreciates the Chancellor's announcement in his November pre-Budget report of increased support for energy efficiency schemes and the increased discounts on the levy to an energy intensive industry such as ours. But the complex and illogical eligibility rules mean that a number of our sites will not receive these discounts, notably those with bottling and packaging separated from their distillery. Importantly, nearly all our small and medium sized companies have chosen not to join the scheme and to accept the extra levy, due to the extra costs and bureaucracy compared to the benefits and discounts.

  17.  Recommendation for Action. To press the Chancellor to adjust the levy and eligibility to it in order to reduce the considerable net cost to our industry—not least due to the bureaucracy involved—particularly as this will disadvantage us compared to our EU competitors.


Cross Border Shopping

  18.  Recent Customs estimates indicate that the revenue lost due to cross-border shopping in spirits in 1998 was £50 million.[3] Recent surveys[4] suggest that consumers are now becoming ever more aware of the price advantages of Calais. Typically, a bottle of gin costing £10.50 in this country will cost £7 in France. The consumer is now looking to import up to 10 litres of spirits per journey, albeit duty paid at the low French rates.


  19.  HM C&E also recently estimated the revenue evaded due to smuggled spirits to be £20 million in 1999 and that lost to be £15 million[5]. These initial figures suggest a small but welcome reduction perhaps due to HM Customs and Excise's success in countering paper fraud and criminal diversion. The estimates do not, however, include freight smuggling of alcohol, which our members believe to be specially significant for spirits. Our smaller companies continue to express concern at the costs our legitimate traders may be expected to bear from new control charges—particularly when a principal cause is the high rate of excise in the first place.

  20.  Recommendation for Action. The Government have recently commissioned an independent investigation into Customs control regimes, lead by John Rocques. However, although this Association originally raised the issues concerned with the Chancellor in person, this facility has not been offered to us by this investigation who have only held one brief short-notice meeting with a two-man delegation from the whole industry. We have joined with the Scotch Whisky Association in expressing concern at "solutions" which merely address symptoms and not causes, particularly those which impose additional costs, controls and burdens on the legitimate trade instead of focussing on the best ways to tackle the illegal trade. The Association and our members remain keen to assist HMC&E especially in the Cross-Border Shopping Working Group and in the Joint Alcohol and Tobacco Consultative Group—both of which now have their future in doubt.

  21.  Recommendation for Action. We urge the Committee:

    —  to impress on the Treasury that the prime cause of these practices is the high UK duty rate compared to our neighbours;

    —  to press HM Customs and Excise that the only way to ensure that new measures are optimal and cost-effective is by maintaining open dialogue with the legitimate industry; and

    —  on behalf of our small member companies seek fair treatment with respect to the monetary "guarantees". HM Customs and Excise call in the latter if exports fail to arrive at their EU destination, even if the original producer has shown due diligence in complying with what are frequently inefficient or out of date customs controls systems.


  22.  Overall. UK gin and vodka exports are worth approximately £200 million and go to over 200 markets worldwide. UK Gin exports to the EU have increased by nearly 50 per cent since 1995, and have remained steady to the rest of the world. UK Vodka exports to the EU have expanded by over 40 per cent since 1995. UK Vodka exports to the rest of the world have expanded six-fold since 1988, but they were even higher between 1993-96 due to exports to Russia, but then fell by £9 million due to the latter's economic crisis and difficult trading conditions.

  23.  One difference from Scotch whisky is that only Plymouth Gin has a geographical designation, which restricts their production to that area. All other UK gin and vodka—including London Gin—can be produced anywhere in the world. Thus, UK owned companies produce over twice as much overseas—150 million LPA—from which earnings are repatriated. Additionally, no maturation period is required for gin and vodka. But law requires that the neutral alcohol must be produced at a different site from the finished product.

Tariff Barriers

  24.  It is vital that the industry has open access to these markets. Typically, a small company producing a premium brand but with no overseas production facilities, will be the most affected. Unlike Scotch whisky, he may be competing in country with like products (that is, non-UK gins and vodkas—for example, Polish vodka in Poland). Although there are tariff barriers in some 140 countries, there is discriminatory taxation against UK/EU gin and vodka particularly in:

    Canada, China, Czech Republic, India, Mexico, New Zealand, Poland, Romania, Russia and Turkey.

  25.  Government Support. The DTI and the European Commission have been fully supportive of our efforts to remove these barriers, in conjunction with the Scotch Whisky Association and Confederation of European Spirit Producers. Negotiations with Mexico and China have been recently successful, whereas those with Poland and Russia have been extremely slow.

  26.  Recommendation for Action. We seek the Committee's support in pressing for ongoing negotiations and to avoid trade retaliation from either side wherever possible—notably with Russia and the USA. We are particularly reluctant to see settlement with the EU Accession countries unless the new tariff is common for all spirits, non-discriminatory compared to their own white spirits, and without derogation or extended implementation periods.

Export Refunds

  27.  Background. Export refunds compensate EU food and drink manufacturers for having to buy cereals, and other agricultural raw materials, at higher prices due to the price support mechanisms of the Common Agricultural Policy (CAP). They enable the industry to compete in non-EU markets on equal terms with producers from outside the EU who are able to purchase their cereals at generally significantly lower world prices. At the end of last year, the Commission, against a background of WTO limitations on refund expenditure and budgetary pressures, made proposals to reduce significantly the expenditure on refunds. Given these pressure, the Association accepted the need for review and understands that refunds are not necessary where EU and world prices are the same.

  28.  Discriminatory Action by the European Commission. Reductions in intervention prices have meant that—for the time being—UK/EU barley and wheat prices are now close to world prices. As forewarned by the GVA, the Commission will, therefore, be making savings on export refunds in any case—particularly because they have arbitrarily changed their method of calculation. However, we have strongly maintained that their reductions have not been fairly apportioned, and intervention pricing in other CAP commodity regimes has not been reformed in the way it has for cereals. In brief, the UK spirits industry has been targeted in a disproportionate manner. One consequence is that UK companies will not be looking actively at producing overseas. Another will be that they may source their cereals or neutral alcohol from abroad, especially where countries (such as USA) heavily subsidise these.

  29.  Recommended Action. The UK government gave the industry support in this case, and secured a Commission commitment to review the impact of these changes—in due course. However, negotiations are proceeding slowly on the sister arrangement of Inward Processing Relief (IPR). This allows limited access to world raw materials markets, without payment of import levies, for manufacturers who are producing goods for re-export to non-EU markets. The Association seeks the Committee's support for gaining due access to IPR for those who have suffered from the loss of Export Refunds.


  30.  The Association is pleased to make this submission to the Scottish Affairs Select Committee. We particularly seek your support on the issues relating to the high rate of Excise duty on spirits. The Association would be delighted to discuss with the Committee any points raised in this paper on which the Committee may wish to seek further details.

The Gin and Vodka Association of Great Britain

September 2000

1   Report by Fraser of Allandar Institute, University of Strathclyde. Back

2   Crawford, Smith and Tanner (Institute of Fiscal Studies) (September 1999). Back

3   Customs and Excise estimated figures issued 26 November 1999. Back

4   BLRA survey January-June 2000 compared to same period in previous years. Back

5   Customs and Excise estimated figures issued 26 November 1999. Back

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