Examination of Witnesses (Questions 340
- 359)
WEDNESDAY 17 JANUARY 2001
MR EDWIN
ATKINSON, MR
RON MACEACHRAN
AND MR
FRASER MORRISON
340. The second question is, "What could
this do for Scotland?".
(Mr Atkinson) It is historic. It goes back many hundreds
of years and I have not found the right book with the right phrasing
yet, whether it is before the Act of Union.
341. If we move on perhaps you could let us
know.
(Mr Atkinson) In due course, certainly.
Mr Sarwar
342. Your memorandum told us that the industry
exported around £200 million worth of exports to over 200
foreign markets. It also claimed that it faces threats from native
spirits, citing the case of Polish vodka. This type of competition
is materially different from that found in the whisky industry,
since whisky can only be produced in Scotland. The Association
memorandum also drew attention to the fact that, aside from Plymouth
Gin, which has a "geographical designation", all other
gin and vodka, including London Gin, can be produced anywhere
in the world. Do gin and vodka producers in the UK face a particular
problem in competing against neutral alcohol derived spirit drinks
produced elsewhere? What risk is there of producers removing production
or bottling of gin and vodka from Scotland to other countries?
How could such risks be alleviated?
(Mr MacEachran) There is clear evidence of competition
in the market from foreign sources of supply, either original
spirit producers or else the spirits bottlers. It is certainly
noticeable at the cheaper end of the market. I think there are
certain examples of it in the branded, more expensive end of the
market as well. It is a trend which is probably also exaggerated
by the current exchange rate issue.
(Mr Morrison) It is really just indigenous costs in
any market. If you can produce less expensively in Poland then
there is obviously an opportunity for business to be exploited
there. It is exacerbated by the exchange rate, though the actual
cost of importing a cheaper product from Poland becomes much more
manageable when the pound is stronger and conversely the ability
to export to these other markets.
343. How much effect does sterling have?
(Mr MacEachran) It is a factor at times. But there
are other factors that contribute to this. The nature of the infrastructure
might be different in these countries. The cost structure therefore
might be different and need a different method perhaps of utilising
the capacities that we have. It is also unclear whether it is
a level playing field for costs and in the way competitors approach
their pricing. Where we might seek to absorb it or to cover our
cost base, it is not necessarily the case that that might happen
with foreign competition. There is a clear cost differential at
this point.
Chairman
344. Taking Mr Sarwar's question a bit further,
if there were no legal requirement that Scotch whisky should be
produced in Scotland, do you think companies would seek to consolidate
gin and whisky production in England or, dare one say, abroad
in countries such as Poland?
(Mr MacEachran) I think the answer to that is possibly,
yes. The evidence of that would be that you do not necessarily
have to exclusively bottle whisky in Scotland. It can be bottled
abroad and there has been a notable increase in that in the last
few years.
345. But production could also go if it was
not a legal requirement.
(Mr Atkinson) There are various issues that come out
in the answer. Raw material, which can be in some cases purchased
cheaper from abroad. A loss of export refunds means that certainly
one company I know of notable size is looking to go elsewhere
because of the loss of export refunds. Then there is the cost
of neutral alcohol. Again one is looking at the possibility of
cheaper neutral alcohol from abroad and my mind is particularly
on the United States, particularly on the subsidisation of that
neutral alcohol in 75 per cent of the trade. I mean by that, 75
per cent of neutral alcohol outside the UK is supported or subsidised
by the nation concerned and the US in particular. Thirdly, the
finished product, whether it is cheaper to make that abroad and
in our full submission, which I hope was laid before you earlier
this week, we identified where costs have gone up in this country,
in particular, in recent months, and where we have concerns over
the cost increases of the finished product.
Mr Tynan
346. In your submission you talk about the cumulative
burden of taxation and regulation. You specifically mentioned
the Climate Change Levy, which you claimed is complex and illogical.
Apart from the Climate Change Levy—I would like to ask about
that in my second question—what other items of regulation
do you see affecting the industry? Are you talking in the region
of, say, the working time directive or the minimum wage or the
administration of working families tax credit? What regulation
are you speaking of?
(Mr Morrison) A number of things. One is the liability
for excise duty. We are under a regime which most would admit
is imperfect. If we want to send goods to, say, Greece, then we
as a warehouse keeper are responsible for the excise duty until
the liability is discharged by reaching a warehouse in Greece.
Despite the fact that we may have sold that on an FOB basis in
a UK port, we have to administer that whole process and are responsible
for that process. So if those goods are diverted by a third party
despite ourselves being totally diligent, or go missing, then
we are responsible and we have to fund the duty on, let us say,
a container of spirit. That could be of the order of £100,000
roughly. So we have to have, internally, a level of administration
which allows us to try and protect ourselves against that liability.
The system is not perfect, as we have seen, and the actual register
of warehouse keepers, which is the process which underpins that,
again is not perfect. You cannot actually look up a record and
confirm that a purported warehouse keeper is in fact genuine.
So there is an internal process there and that is part of the
regulatory process that we have to administer internally. There
are other things. For example, environmental issues are more and
more being thrust upon us. The urban waste water directive, for
instance; the water framework directive; accident and hazard regulations
and various pollution prevention and control regulations. Those
are all relevant. They are all self-administered and are all things
that we have to undertake ourselves and place quite a considerable
burden and therefore a cost and time burden on the industry. Health
and safety, as you suggested, is also one. It is not that we have
any problem with these, apart from the actual burden of time effort
and cost of doing so. That is almost like a hidden cost underneath
the general operational costs. These are probably the main ones.
(Mr Atkinson) Chairman, if I may point out; on customs
regulations this Government brought in the Alcohol and Tobacco
Fraud Review at the beginning of its period of office, which was
welcomed. The one thing that I, on behalf of the Association,
have pressed throughout is that the danger is that added control
is paid for by the legitimate industry to get the Chancellor's
benefit against the illegitimate, and so when a whole range and
raft of measures are introduced or proposed, the one thing I have
asked—we have yet to see whether it will be fully accepted
and carried through—is that cost benefit analysis is done
on these many many regulations and controls that continue to come
in. Otherwise it is the legitimate that pays with the added bureaucracy
and tape for the benefit of the Chancellor, against the illegitimate.
347. The liability for excise duty, how long
has that been a problem? Is it because it is cumulative, or is
this a new problem?
(Mr Morrison) It was introduced in 1993 so it has
been around for eight years or so and something we have had to
deal with. But, for example, there is no due diligence excuse.
The industry is responsible and liable. We cannot say that we
took every precaution, that we complied with regulations and that
and our systems are perfect. There is no excuse.
348. What was the cost to industry? You said
£100,000. Was that over a year?
(Mr Morrison) No, £100,000 is the appropriate
UK Excise Duty the value of one container. If we ship one container
of vodka to Greece and that is lost, then we are responsible for
the excise duty and the excise duty rate we are charged at is
probably UK duty unless we can prove it went astray in another
country.
349. So on an annual basis how much would it
cost you?
(Mr Morrison) It depends how much of your product
is lost.
350. Last year?
(Mr Morrison) Can I give you the answer in some other
way because there is information but it is relevant to a particular
company.
Chairman: Perhaps you could put it in writing[8].
Mr Tynan
351. Could you also explain your concerns over
the Climate Change Levy?
(Mr Atkinson) Certainly. Our evidence here is comparable
to that you have received I guess from the Scotch Whisky Association
because we are working totally with them in a stand-alone company
to administer the Climate Change Levy. Our first concern is one
of eligibility; that is, eligibility for the 80 per cent discount.
The rules are incredibly complex, bureaucratic and potentially
costly to our industry. For example, we have one company where
the gin stills are in the same site as the bottling, so therefore
the whole of that site qualifies for the 80 per cent because it
is one continuous process. If his bottling had been a mile and
a half away—I can think of a company in Scotland where separation
is only a mile and a half—then that bottling site will not
get the 80 per cent discount because of complex rules which I
could bore you with for about an hour. We find that to be unfair.
Instead of, as the Chancellor said, ending up with a Climate Change
Levy having no net cost to the industry, we are ending up at the
end of the day with a huge net cost to the industry. Some of this
is easy to calculate because we know the electricity and charges
on sites that will not qualify. But what has not been said is
the cost of the bureaucracy. We have spent thousands of pounds
in our Association, as have Scotch Whisky, on the very complex
negotiations, calculations and data gathering for this Climate
Change Levy. So the cost to the industry is not just in sites
that do not qualify that we believe should qualify, because after
all the overall idea is to save energy, but it is also in the
huge bureaucracy that has grown up around it already, both within
companies, within the Association and within government. Finally,
I should say though that many of the remarks we have made have
been individual about excise or individual about some tax aspect,
or individual about export refunds, or individual about costs,
environmental costs and now Climate Change Levy. What we would
like to highlight to you is the cumulative burden. That is what
companies look at when they say, "Should we stay in Scotland?"
Sir Robert Smith
352. There has been a lot about smuggling and
the increasing worries of smuggling. Clearly in your concerns
here the growth in smuggling since the introduction of the European
market is of great concern. How has the increased ease with which
duty can be evaded affected the industry?
(Mr MacEachran) In general it is causing us to lose
control of our distribution, to a certain extent, and therefore
that means that pressures are placed on the industry. It causes
us to lose control of our distribution because it allows the opportunity
for customers or consumers to source from another market and that
in turn can affect the margins of our industry.
353. You have already touched on some aspects
of the controls in terms of diversion. When you talk about smuggling,
do you have any idea of breaking it down into individuals doing
a small trade in a van and others in an organised way bringing
a lot of product into the country? Do you include in smuggling
the diversion of duty-free goods going out of the country?
(Mr Atkinson) On the last point, I do not have a figure
of duty-free goods going out of the country. I can say that straight.
With respect to your saying, have we got a breakdown, yes we do
have a partial breakdown provided by Customs. But the major problem
has been that freight smuggling of spirits has not been assessed
by Customs. They have the right of search which we do not have.
So we are combined with the brewers in having quayside surveys
and you have had evidence from them already. We have been concerned
both about the increase in cross-border shopping and the state
of smuggling. But it is freight smuggling which we do not have
a handle on in the industry. We are anticipating some figures
from Customs. They have a special report going on under Mr. Rocques.
Normally we get figures out of them in November every year. That
has been delayed until Mr. Rocques has finished his report and
it is made public.
354. I think Customs might be coming to us with
something.
(Mr Atkinson) We wish they were. Perhaps I will come
and listen because we have no access to his research. But we are
led to believe that the freight smuggling is of significant concern
with regard to spirits. Having said that, the added controls of
general freight, like x-ray machines, has probably had a knock-on
effect on other forms of freight smuggling, but we have no statistics
one way or the other on that.
355. What further steps do you think the Government
might take to prevent duty evasion?
(Mr MacEachran) A fundamental point clearly is the
levels of duty. That is a motivator to evade duty and therefore
there are two choices. One is to move towards a levelling of duty
or put in even more controls over the process. As has already
been pointed out, the costs of such controls tend to end up with
the industry that is following the law.
356. Finally, you expressed concern about cross-border
shopping and say their future is in doubt.
(Mr Atkinson) If I may say, on cross-border shopping
we do not know the answer, but the general relationship between
Customs and the industry has been reviewed and the committee that
we mostly worked with has been rejuvenated. We are happy at the
moment that the dialogue will start again and we look forward
to that. If I can just emphasise the point that my colleague made
about differentials with France and excise, that must be the most
basic cause of both smuggling and cross-border shopping. Switzerland
had a bigger problem. They cut their excise. They lost no revenue.
They cut out a huge amount of the illegalities. Likewise Denmark
and Sweden are looking at this vis-a-vis Germany. I can only give
you anecdotal evidence that their administrations are looking
to reduce their excise to the German level. In Sweden there is
clearly statistical evidence that 40 per cent of spirits enter
the country illegally or are made illegally because of their high
rate of excise and because of the high rate of excise compared
to their neighbour, Germany.
357. It also did their ferry companies a lot
of damage. Would it be worth getting the figures on Switzerland?
(Mr Atkinson) We can provide those[9].
Mr Sarwar
358. You say to stop the smuggling the easiest
way is to reduce the duty. In the meantime, who is the loser?
I mean obviously the Chancellor is the loser, and then possibly
the people who are in the distribution trade—cash and carry
and supermarkets. They are the losers. Do manufacturers lose out
as well? If the Government said that there should be special labels,
"For export only", that might help because the people
who are selling the stuff would see the label. It would be visible
in the shop and in the supermarket and it would deter people from
buying it.
(Mr MacEachran) In relation to whether the manufacturer
loses out, well ultimately the manufacturer may well lose out
because if it his product that is coming back in from abroad,
the price position in the market changes and that therefore can
destroy price platforms of markets generally. That can lead to
price support increases being required which reduces profits so
it can have a knock-on effect, sometimes quite significantly.
Special labels might be an extra burden on the industry. I am
not sure what the cost would be. At this point there are different
labels for different markets so on most bottles you can actually
see which market the products are intended for. Sometimes a local
market requires you to make it extremely clear on the bottle as
to where it is sent.
(Mr Morrison) Some products are legitimately re-imported
back into the UK. They may be slightly different to those normally
sold in UK. They are already in the supermarkets just now legitimately,
through legitimate re-importing; goods going out and then coming
back into the UK but with the same or different labelling on the
product. It will not really make too much difference other than
it being another cost.
(Mr Atkinson) If I may answer very quickly on that
one. There is a disparity of views among our member companies
to some of the points being raised. It should be clearly said
that we already work closely with Customs towards better marking
of one kind or another to identify sources of the spirit and indeed
companies also have ways of making it clear if a product is counterfeit.
So a lot of that has happened in different ways of marking or
whatever. There is a view that as long as you sell the spirit
it does not matter. But if they are buying the spirit in Calais
and it has come through the French distributor, the margins have
been affected because it is another tier in the chain. So most
of our companies are against that. With respect to labels, although
it is true that there are some already marked "for export
only", as a general principle we are always getting requests
for more information, more data, more this and more that on labels
or more labels. Ultimately that means more costs.
Chairman
359. On the question of health and advertising,
as you know alcohol abuse is a serious social problem in Scotland.
Greater Glasgow Health Board have also contrasted the amount spent
advertising alcohol with that spent on campaigns to reduce excessive
drinking. What concerns does your industry have regarding the
adverse health and social costs of alcohol abuse? Do you accept
that sums spent advertising alcohol impede campaigns to reduce
excessive drinking?
(Mr Atkinson) The industry has a long-standing commitment
to reduce alcohol misuse, Glasgow or elsewhere. The difference
perhaps in some of the remarks you may have implied is how we
go about that. The industry clearly believes that the way to reduce
misuse is to target misusers and "at risk" groups. We
have supported both the Government directly and other campaigns
in a number of ways, and with industry initiatives of our own
to further enhance that campaign of ours to help identify the
misuser, target the misuser and that includes education; it includes
supporting the Government and being part of the discussion process
on the Sensible Drinking Message, Drink-Drive campaigns, protection
of young people, responsible advertising. We have our own very
tight self-regulation mechanism and our companies have combined
a number of Crime and Disorder partnerships. So the industry is
clearly concerned about any alcohol misuse and sees the way to
get over that to target misusers and at-risk groups. We are clearly
against what are known as whole population measures. Any whole
population measure has lack of evidence as to its utility in the
sense that broad-based measures to reduce overall consumption
have not been found to have wide effect. They are found not to
affect the misuser. So our targeting is on the at-risk groups.
That is where we have worked with the Government and are continuing
to do so, especially in consultation over the Alcohol Misuse Strategy
which we are very much hoping that the Government will progress
but which seems to be taking a long time.
8 See evidence, pp. 129-130. Back
9
See evidence, p. 129. Back
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