Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 340 - 359)



  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.


  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.


  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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