Select Committee on Scottish Affairs Appendices to the Minutes of Evidence


Memorandum from The Scotch Whisky Association (DIS 5)

Letter to the Clerk from the Director of Government and Consumer Affairs, The Scotch Whisky Association

  Thank you for inviting the industry to update its submission to the "Inquiry into the Scottish Drinks Industry".

  In the attached paper we have summarised any salient developments in the key issues affecting the industry. You will recognise many of the headings from our previous submission[1], but we have also taken this opportunity to draw your attention to the potential impact of the COMAH and Freshwater Fisheries Regulations.

  If you require further information on these or any other points, please do not hesitate to get in touch.

Director of Government and Consumer Affairs

The Scotch Whisky Association

The Scotch Whisky Association Update

  1.  This paper updates The Scotch Whisky Association's November 2000 submission to the Scottish Affairs Select Committee's "Inquiry into the Drinks Industry in Scotland". To prevent repetition, we have restricted comment to those areas where significant developments have taken place.

  2.  However, we would also reiterate that the industry's priority is to end discrimination against Scotch Whisky in the UK. In 2001, the Chancellor froze the duty on spirits for the fourth consecutive year, and this was welcomed by the industry. Nevertheless, the 2001 Budget did not reduce the tax differential between Scotch Whisky and other alcoholic drinks.

  3.  This year, the industry will again advocate a 4 per cent duty cut. Even with a year on year cut of 4 per cent, it will take almost 10 years to achieve tax parity with other alcoholic drinks. A single rate of duty based on alcohol content for all alcoholic drinks would finally lay to rest an archaic system that discriminates against Scotch Whisky and other UK spirits, and which is against the interests of the wider economy.

  4.  In the past year alone, the industry has had to contend with several new pieces of legislation, the impact upon the industry of several of these is examined in the following pages. While each piece on its own may not amount to a great deal of money, the cumulative burden is a significant squeeze on the competitive position of the industry. Many economically fragile communities depend upon the Scotch Whisky industry—unnecessary regulation threatens their long-term future.

The Water Framework Directive

  5.  Consultation on the implementation of the Water Framework Directive is now well underway in Scotland. The Scottish Executive issued its first consultation paper in June and has since held a conference for interested parties to meet and exchange views. The industry also met with the Deputy Minister for the Environment on 18 September and we are grateful that the consultation process is proving to be so thorough and inclusive.

  6.  A summary of our position on the implementation of the Directive is set out below:

    —  the Scotch Whisky Association is keen to ensure that the legislation implementing the Directive does not overburden the industry with unnecessary restrictions or red tape. The legislation should allow the industry to maintain production in an economically, environmentally and socially sustainable way. Forty thousand jobs depend upon the industry; great care should be taken to ensure that regulation is not imposed simply for regulation's sake;

    —  crucially, the Scottish Executive should make full use of the exemption provision contained in Article 11(3)(e) of the Directive, which allows Member States to exempt from controls abstractions that have no significant impact on water status;

    —  "significant impact" should be interpreted as "significant harm" and only those distilleries deemed to be causing significant harm should be considered for licensing or controls. Distilleries that do not harm the water source should not have to apply for exemption. The onus of proof should rest with the competent authority;

    —  to comply with the European Convention on Human Rights, the Executive should set up an independent appeals procedure, where decisions on detailed control conditions and the requirements for licensing can be reviewed; and

    —  the charging system should not go beyond cost recovery or penalise industry on the pretext of encouraging the efficient use of water. Such economic instruments have no place in Scotland as most parts of the country have an abundance of water.

  7.  We look forward to working with SEPA in a constructive manner to secure jobs in the industry for the long-term.

The Freshwater Fisheries Regulation[2]

  8.  A further water related issue that could seriously affect certain distilleries is the temperature limits laid out by the Freshwater Fisheries Regulation 1997. The regulation seeks to set a limit of a 1.5oC increase in temperature for warm water discharges (the water that is used for cooling and then returned to the water source). The strict imposition of such a limit would seriously affect the viability of some distilleries, particularly in the summer months.

  9.  SEPA has been awaiting the results of research into the impact of temperature uplifts on Atlantic salmon, jointly funded by the Scottish Executive and the industry. The results indicate that temperature increases of up to 5oC have no adverse effect on the development of Atlantic salmon. SEPA will now consider the report.

  10.  In view of the strong scientific evidence in this report it is hoped that an application for derogation from the regulation will be supported by SEPA and then made by the Scottish Executive or UK administration to the European Commission. The report demonstrates that there is no environmental reason to limit temperatures to the 1.5oC proposed. The industry hopes that other considerations will not determine the decision.

Roques Report

  11.  Illegitimate trade, and the control loopholes that facilitate it, damage the Scotch Whisky industry's interests as well as the Exchequer's The industry is pleased that John Roques' investigation into the problems that led to the excise evasion fraud of the 1990s was both thorough and independent.

  12.  To coincide with the publication of the Roques report, and the accompanying report from the National Audit Office, Customs and Excise have for the first time published estimates of the scale of fraud. Although Customs and Excise have now successfully stemmed the types of "outward diversion fraud" prevalent in the mid-1990s (which prompted the Roques inquiry), they estimate that large-scale spirits fraud (especially "inward diversion fraud") still equated to up to £500 million of lost revenue in 1999-2000. This is equivalent to some 16 to 18 per cent of total tax receipts from legitimate sales of spirits. Clearly there remains a substantial problem.

  13.  The industry was concerned that the Government would respond to such problems by burdening the legitimate trade with new control measures, rather than focussing on the fraudster. Whilst the industry is still considering the detailed Roques recommendations and the Government's response to them, it does appear that much of the report does not impinge unnecessarily on the legitimate trade. Nevertheless, there are a number of proposals which could have a significant practical impact, and representatives of the industry are already holding constructive discussions with Customs and Excise officials to ensure the smooth implementation of the proposals.

  14.  Following one of the recommendations, Customs and Excise have initiated a feasibility study into the possible application of UK fiscal marks to alcoholic beverages, the primary focus of which will be on spirits. The industry is co-operating fully with this study, and a number of major SWA member companies are working closely with the Customs and Excise project team to identify the potentially enormous costs, burdens and practical aspects. It is worth stating that the EU spirits industry, often with the support of the UK Government, has always strongly opposed the use of fiscal marks (usually in the form of strip stamps) for individual EU, and other overseas, markets. These are often discriminatory against spirits, and within the EU they further undermine the principle of a Single Market.

  15.  The industry reiterates the concerns expressed in its earlier submission about the duty exposure it suffers because of a flawed EU control/documentary framework for the holding and movement of excise goods.

  16.  In a euphemism used by Mr Roques, the industry considers that one of the most effective control measures would be "to reduce the profitability of smuggling". He notes that "the UK has amongst the highest duty rates in the EU and subsequently the greater problems in tackling fraud". He agrees with the conclusion that "a lack of harmonised excise duty rates" is a continuing constraint to the implementation of effective controls.

Export Refunds/IPR

  17.  In 2000, the European Commission's discriminatory targeting of cereal-based spirits for cuts in export refunds directly undermined the Scotch Whisky industry. Distillers using EU maize have been seriously affected by the cuts as the EU price for maize has remained well above the world price. One site alone estimates that the reduction in maize refunds will cost £0.5 million in 2001, at a time when there are other significant cost and regulatory pressures. We can see no justification why the Scotch Whisky industry has been targeted while other EU maize processors continue to receive refunds at the full rate.

  18.  At present, EU/world price convergence means that distillers using EU wheat or barley have not yet felt the full effects of the refund cuts. However, if EU and world prices should diverge again in the future, these distillers shall also be forced to pay far more for EU wheat and barley than those processors still eligible for refunds.

  19.  The Commission promised the UK that it would review the market effect of the targeted refund cuts. The industry hopes that the UK government will continue to urge the Commission to visit the industry to learn its views and experiences first-hand.

Inward Processing Relief

  20.  The Commission indicated that cuts to export refunds would be mitigated by easier access to Inward Processing Relief (IPR), the alternative form of compensation by which EU processors of export products can obtain levy-free access to world-priced cereals.

  21.  The Scotch Whisky industry argued that:

    (i)  when calculating IPR, the Commission should take account of the refunds removed from all targeted products, including cereal-based spirits; and

    (ii)  targeted sectors should be given priority access to the facilitated form of IPR.

  22.  However, when the Commission calculated the IPR level for 2002, it largely ignored the refund requirements of those whose refunds have been abolished or reduced. Therefore, far from giving priority to those sectors hit by refund cuts, the Commission continued to discriminate against them. Facilitated IPR was originally presented as a sweetener for those industries facing cuts. It clearly cannot perform this function if insufficient account is taken of the refund requirements of the targeted industries.

Climate Change Levy

  23.  The UK spirit drinks sector successfully negotiated a Climate Change Agreement with the then Department of the Environment, Transport and the Regions. In exchange for challenging energy efficiency targets to the year 2010, 71 distilling sites across the UK will receive 80 per cent discount in the CCL.

  24.  Nevertheless, it is estimated that the CCL will still add £1 million per annum to the industry's costs, even taking account of the 80 per cent discount and the reduction in National Insurance Contributions.

  25.  The industry's bottling halls, which are generally not co-located with distilling operations due to the size, geography and economics of the industry, remain unable to obtain the 80 per cent discount because of the widely-criticised way in which the eligibility criteria were framed. This is still considered a gross anomaly. It is manifestly inequitable that other similar industries, where the production and packaging operations happen to be co-located, receive the 80 per cent discount across all the operations. Again this squeezes the industry's competitive position and it is all the more keenly felt given that the discount schemes were specifically intended by the Chancellor to protect the interests of "those sectors particularly exposed to international competition"!

  26.  The CCL has, as predicted, been riddled with other anomalies and devils in the detail, and has involved an unprecedented amount of bureaucracy and management time. It has been described as a "charter for consultants and lawyers". Many have questioned whether it was the best way to achieve the laudable environmental objectives that it set out to achieve.

  27.  Indications were given before the General Election that the Treasury might be willing to review the CCL policy framework, especially the eligibility criteria. The industry calls for a full, meaningful and early review.

Control of Major Accident Hazard (COMAH) Regulations 1999

  28.  The Control of Major Accident Hazard (COMAH) Regulations are designed to minimise the risk of major accidents occurring at industrial sites that handle "dangerous substances". COMAH applies to chemical plants and oil refineries, and because Scotch Whisky is a flammable substance, it too comes under the scope of the regulations. The COMAH regulations are enforced jointly by the Health and Safety Executive (HSE) and the Scottish Environmental Protection Agency (SEPA) because COMAH covers both the safety and environmental dimensions of potential accidents.

  29.  While the Scotch Whisky industry has little disagreement with the application of COMAH from a Human safety viewpoint, we question the degree to which Scotch Whisky operations create environmental "major hazards" or are capable of a "severe environmental impact" as defined under COMAH. The industry accepts that accidents can be harmful to the environment, and of course already complies with a host of other environmental regulations enforced by SEPA. The issue is about the degree of environmental harm and the extent to which the industry falls within the environmental scope of COMAH.

  30.  For example a fire at a whisky warehouse would not cause "permanent or long-term" environmental damage. Neither the whisky, the casks nor the warehouse itself, emit toxic fumes when alight. Compared with some of the other hazardous industries covered by the Regulations, the risk to the environment is much lower.

  31.  The industry believes that any measures proposed under COMAH by the joint Competent Authority (CA ie. HSE and SEPA) should be consistent and proportionate to the risk of a major accident hazard.

  32.  There has been very fruitful co-operation during recent years between the industry and the HSE over the interpretation and application of safety regulations. Our recent health and safety record has been very good. Recently the industry held constructive meetings with SEPA and particularly the HSE, to discuss its COMAH concerns and the agencies' support for industry COMAH workshops has been much appreciated.

  33.  However, following these meetings there still remains particular concern regarding Regulation 4 of COMAH. This states that "every operator shall take all measures necessary to prevent major accidents" and that the risk should be reduced to a level as low as reasonably practicable (ALARP). The exact interpretation of these phrases is believed to be under consideration within government.

  34.  The CA suggested in a letter to one of our members that "All Necessary Measures" must be taken to prevent major accidents unless the costs became "grossly" disproportionate to the benefits. The implication being that the CA could enforce measures where costs are "disproportionate", but not "grossly disproportionate" to the benefits. Our concern is that we may be required to spend excessive sums of money covering every conceivable eventuality. We would also consider it "disproportionate" if best available practice were required at an early date at all COMAH sites (including older ones). Such large-scale capital replacement programmes must by their nature be long-term.

EU Minimum Rates Review

  35.  The economic consultant's report referred to in our original submission was delivered to them in the spring. DG Taxud have regarded it as only one strand of the information that they are drawing upon in formulating their review of the Minimum Rates Directive.

  36.  The timetable for proposals from DG Taxud has slipped several times. They now advise that the report on the functioning of the Minimum Excise Rates for alcoholic beverages, together with any proposals for change, will not be circulated among Commissioners before October. Following consultations with the other Commissioners, an official report, together with any proposals for change, will be submitted to the Council and the European Parliament.

  37.  It is expected that DG Taxud will introduce a package of measures aimed at improving the functioning of the single market by addressing the tax disparity between different categories of alcoholic drinks, and also between different Member States.

  38.  The industry welcomes the UK's approach that any reform of the Minimum Rates must deal with the discrimination against spirits contained in the current Minimum Rates structure. The industry urges the government to remain firm in this aim when negotiations over the Commission's proposals commence.

International Trade

Update India and Turkey

  39.  India is the largest whisky market in the world, but Scotch Whisky has been almost excluded from it for some 40 years. Until 1 April 2001 the importation of Scotch Whisky (and other spirits) for the domestic market was prohibited by stringent import licensing requirements. Following their removal, the Indian Government has sought to restrict spirits imports by imposing an exorbitant and discriminatory fiscal burden, ranging between 464 per cent and 706 per cent. This has led to an EU démarche to the Indian government.

  40.  A similar situation prevails in Turkey where, despite a Customs Union agreement with the EU that is designed to facilitate trade between the two zones, formidable barriers remain. These include unreasonable import permit and certification requirements, the state monopoly's sole distribution rights for most categories of spirit, and excessive excise taxes (around 190 per cent). Serious efforts are currently being made to amend draft legislation whose effect would be to block meaningful market access to most companies for at least the next five years.


  41.  Scotch Whisky remains one of the major industries in the Scottish economy, and one of the leading manufactured export earners for the UK.

  42.  We believe that the above update, together with the earlier written submission and the oral evidence given to the Committee, demonstrate the importance of ensuring that the excise duty and wider regulatory burden should not impose an ever increasing squeeze upon the industry's competitive position, if it is to flourish over the long-term, thus securing jobs and generating export sales for the benefit of the local and national economies.

The Scotch Whisky Association

September 2001

1   HC 973-ii, Session 1999-2000, pp 39-46 and pp 69-70. Back

2   Full title "Surface Waters (Fishlife) (Classification) (Scotland) regulations 1997". Back

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