Standing Committee A
Thursday 26 April 2001
[Mr. Jimmy Hood in the Chair]
(Except clauses 1 to 3 and 16 to 53 and
schedules 4 to 11)
Alcoholic liquor duties
Question proposed [this day], That the clause stand part of the Bill.
Question again proposed.
Mr. Michael Jack (Fylde): I welcome you to our proceedings, Mr. Hood. When we broke from the morning session, I was observing that the Customs and Excise press release C&E2 stated that the measure had the full support of the National Association of Cider Makers. However, the representation that I received from Devon Contract Packing Ltd makes it clear that the measure was not put forward by the National Association of Cider Makers but, as the letter says,
``by the two largest manufacturers, privately, after an NACM meeting.''
The letter makes a further point:
``The worst part of the proposed legislation is the immediate implementation date. As there was no prior warning that this legislation was pending, or indeed no consultation with any of the firms who currently use DPD, we will be put in an impossible commercial position.''
That does not seem to me to be a very sensible way to go about things. Devon Contract Packing Ltd is a small enterprise and, as the hon. Member for Torridge and West Devon (Mr. Burnett) said, it is in an area that is suffering the economic ravages of the foot and mouth outbreak.
I hope that the Financial Secretary will give us some hard facts as to why the measure has been put forward. There is no specific information in the Government's propaganda about the potential duty losses. Devon Contract Packing Ltd says that it gains financially from the status quo to the same extent that the big cider manufacturers gain from their deposit arrangements. The letter concludes by proposing a complete review of cider duty, and that would be right way to discuss the measure.
Mr. Richard Ottaway (Croydon, South): I welcome you to the Chair, Mr. Hood. I endorse the remarks made by the hon. Member for Torridge and West Devon and my right hon. Friend the Member for Fylde (Mr. Jack). They made their points succinctly.
In truth, the argument boils down to two fundamental points. First, pre-existing contracts are in place. If the 12-month moratorium that has been suggested were allowed to come into effect, the small producers would not be put at a disadvantage. Secondly, the position of wine producers has not yet been addressed, and the small cider manufacturers feel that that is unfair. They argue that the regulations have been in place for 25 years and, if the wine producers are entitled to consultation before the rules are changed, they should have the same entitlement. My right hon. Friend the Member for Fylde made the point about consultation. Under the circumstances, we hope that the Financial Secretary has listened to the points that have been made.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I, too, welcome you to the Chair, Mr. Hood.
Clause 5 provides for an amendment to the Alcohol Liquor Duties Act 1979, which will give Customs and Excise the power to tackle tax avoidance practices in the production of cider and perry. I want to give a careful account of that, because the position is a little different from the one that we have been informed of so far.
The measure provides power to make regulations regarding operations and processes performed on cider and perry. In addition to regulating those activities, it will enable Customs and Excise to prohibit operations after the duty point that would, if they had been carried out before it, have resulted in greater duty being payable on the finished product. The most common example is the dilution of cider after duty has been paid. As we have heard, cider is dutied in bands according to strength. Dilution is a straightforward tax avoidance practice whereby cider is produced at the top end of a band and duty paid on that volume, and then diluted to decrease its strength but increase its volume, effectively reducing the duty liability of the finished product.
Mr. John Burnett (Torridge and West Devon): Will the Financial Secretary give way?
Mr. Timms: Before giving way, I must point out that dilution before the duty point is indeed standard practice in the industry but dilution after the duty point did not, as far as I know, begin until 1999. Neither the National Association of Cider Makers nor Customs and Excise are aware of any cider maker diluting after duty pointwhich would, if it were legal, be an obvious duty-avoidance techniqueprior to February 1999. I will explain in detail how that process arose.
Mr. Burnett: I also welcome you to the Chair, Mr. Hood. It is a pleasure to serve under your chairmanship. I shall make a concise intervention and hope that I might catch your eye thereafter.
The situation is not as clear-cut as the Financial Secretary has asserted because, as I said this morning, there are at least three aspects: the small cider makers who dilute post duty cannot afford a bond; they pay duty on ullage and spillagewhile the contrary is not the case for the large bonded companies; and they pay their duty upfront.
Mr. Timms: I shall come to each of those points. The smallest cider makers do not pay duty at all. We are talking about an operation whereby a medium-sized cider producer sends product in bulk to a bottling operation, rather than making cider. Small cider makersthe real cottage industrydo not pay any duty.
Cider makers have long been aware that the dilution of cider after the duty point is, in the eyes of the law, a tax avoidance scheme and that legislation to outlaw the practice would be introduced at the earliest opportunity. The National Association of Cider Makersreference has been made to two large companies who belong to ithas fully supported that practice and has included a statement to that effect in its own code of practice. In the letter that it sent to all members of the Committee the association said:
``Ever since 1976, it has been a condition of NACM membership that no cider maker should indulge in this practice.''
I am not therefore sympathetic to any cider makers who have decided to engage in the practice and obtain a short-term gain over their competitors in a duty benefit. If cider makers have invested on that basis, they have done so entirely at their own commercial risk.
Cider duty was reintroduced in 1976. The Customs interpretation of the law at that time was that dilution of duty-paid cider was not allowable and, as I have said, that was fully supported by the National Association of Cider Makers. With the introduction of the single market and the adoption of the European Union structures directive, it was confirmed that operations performed after the duty point, which would result in more duty being payable, are not permitted.
In February 1999, PricewaterhouseCoopers, a company of some ingenuity in these matters, challenged the Customs' interpretation of UK law on behalf of a bottling companynot the one that hon. Members were talking about. Legal advice to Customs, taken in response to that challenge, was that legislative amendment would be necessary to make the practice clearly illegal. However, until February 1999 no one had thought that it was not illegal. In March, Customs informed PricewaterhouseCoopers that steps would be taken to prohibit the practice and, concurrently, the National Association of Cider Makers was informed; it fully supported the Customs' position, and in April 1999 issued advice to its members to that effect.
Sitting suspended for a Division in the House.
Mr. Timms: I shall resume the chronology of events that I was running through. I referred a moment ago to a letter that I said had been sent to all members of the Committee. I understand that that is not the case; it was sent to members of the parliamentary cider group.
Mr. David Taylor (North-West Leicestershire): Would that be termed in-cider trading?
Mr. Timms: It probably would. If only I could think that quickly myself. However, as I said, the letter said that it had been a condition of NACM membership since 1976 that no cider maker should indulge in that practice. In April 1999, the NACM issued advice to its members outlining its support for Customs' position. It reads:
``In line with its established policy, NACM members are asked to ensure that wittingly or unwittingly they do not become involved in the supply of bulk duty-paid cider that may then be diluted and resold.''
The notice also pointed out that as consistently advised by Customs and Excise, the provision of duty-paid cider for resale is an offence. So the position was clear.
We did not include the provision in last year's Budget because of pressure on space in the Finance Bill, but Customs became aware last September of another bottling companythe one that operates in the constituency of the hon. Member for Torridge and West Devondiluting duty-paid believed to be supplied to them by a then member of the National Association of Cider Makers. Customs wrote to Devon Contract Packing on 13 September explaining that although nothing in current law prevents that practice,
``We plan to legislate against the practice at an early opportunity.''
So the position was made clear to the company concerned seven months ago.
In the run-up to the Budget, the National Association of Cider Makers pressed for the law to be clarified. On Budget day, the NACM held its annual general meeting, during which the resignation of the company that is supplying the company in the hon. Gentleman's constituency was demanded, and the company ceased to be an NACM member from that date.
Mr. Burnett: May I clarify just one quick point of detail? Did the Financial Secretary say that the letter of 13 September was written to Devon Contract Packing?