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20 Jan 2004 : Column 405WH—continued

Spirits Bottles

2 pm

Sir Nicholas Winterton (in the Chair): Having had an excellent lunch, I am delighted that we shall be discussing strip stamps on bottles of spirits this afternoon.

Mr. Alan Reid (Argyll and Bute) (LD): I, too, am delighted, Sir Nicholas, that Mr. Speaker selected this important subject for debate.

The Scotch whisky industry produces an excellent product and supports 41,000 jobs in Scotland, many of which are in remote rural areas where alternative employment would be very difficult to find. The islands of Islay and Jura in my constituency are world famous for their excellent single malts. The seven distilleries in Islay and the one in Jura provide much needed employment on those islands, and any proposal that harms the competitiveness of the Scotch whisky industry would have a devastating impact. The Government should also bear it in mind that the whisky distilled on Islay and Jura is a huge source of revenue for them.

There are also distilleries in Campbeltown, Oban and Tobermory.

Mr. Michael Connarty (Falkirk, East) (Lab) rose—

Sir Nicholas Winterton (in the Chair): This is rather early for an intervention.

Mr. Connarty : It is never too early for a talk over a tot of whisky. Before the hon. Gentleman talks about lesser brands, I should say that he will welcome the fact that the new owner of Whyte and Mackay, which owns the Jura brand, is investing £20 million, much of it in a new bottling plant in Grangemouth in my constituency. Extra burdens such as the strip stamps make such investment less attractive.

Mr. Reid : The hon. Gentleman makes the important point that the strip stamp scheme places extra burdens on the industry and makes investment in bottling plants, distilleries, or in any other part of the industry, less attractive. I want to talk about that threat later.

As I said, the industry provides employment in remote communities, and there are distilleries in Campbeltown, Oban and Tobermory, as well as in Islay and Jura. The whisky begins its life in the remote parts of Scotland, but it also provides much employment in Scotland's industrial areas in bottling plants and other parts of the process.

The Scotch whisky industry, like the rest of the legitimate spirits trade, is very keen to stamp out duty fraud, but it is also concerned, with some justification, about the cost implications of the Government's strip stamp proposals. The Government do not dispute the increase in cost. The pre-Budget report states:

In the report, the Chancellor declared his intention to make provision for legislation in this year's Finance Bill to put strip stamps on all bottles of spirits sold in the

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United Kingdom. The legislation is intended to come into effect in 2006. The Chancellor also said that he would not introduce it if the spirits industry proposed what he considered to be a workable alternative. I will talk about the alternatives later, but first I want to talk about the strip stamp scheme.

The Government originally proposed a strip stamp scheme two years ago, but rejected it because Ministers accepted that the measure would have a severe impact on the legitimate spirits trade. It has been estimated that the scheme would cost the Scotch whisky industry £280 million. Costs would be involved in altering production lines and bottling plants so that stamps could be fixed to the bottles. Administrative costs would be involved in security and in procedures for handling the stamps, which would be valuable commodities, worth £5.48 each in excise duty. There would also need to be procedures to deal with damaged stamps.

Tax stamps would make free and open European trade impractical. Currently, the destination of bottles is unknown at the production stage, but a tax stamp scheme would force producers to decide at the bottling stage whether bottles were destined for the UK market or abroad. That would reduce flexibility and inevitably increase costs.

The main cost of the scheme, however, would be incurred in buying the stamps up front, long before the industry could recoup the money by selling the bottles. At present, duty is paid only when the bottles are sold. Having to buy the stamps at the bottling stage would mean that the industry had to find extra working capital, with consequential interest repayments. As I said, the total cost has been estimated at almost £280 million.

The Government have said that there may be a deferred payment scheme, but their current proposals lack detail. That must be remedied, and the system must be clarified. The Scotch Whisky Association told me that it had received no information about how the system would work. The pre-Budget report also lacks detail. It states that:

In other words, the Government will consider the possible deferment of duty only after the scheme has been implemented. They intend to invite the House to pass legislation, but they will explain how it works only after it has been implemented. That is simply not acceptable. The Government must tell us beforehand how the scheme will work and, in particular, whether there will be arrangements for deferring the payment of duty until after the bottles have been sold. Announcing a scheme without giving details of how it will work is bound to cause confusion. I should remind the House that whisky must mature for at least three years before it can be legally marketed as Scotch whisky. For premium brands, the period is many more years than that. The industry must therefore plan well into the future, but it cannot do so if the Government will not release details of a scheme that they plan to implement in two years' time and which could be very costly to the industry. Even the threat of such a scheme could damage the industry.

Ideally, I would like the Economic Secretary to the Treasury to announce today that the Government have decided to abandon the scheme, but I suspect that he will

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not do so. However, I expect him to give details of the scheme that he proposes and, in particular, to tell us whether there will be arrangements to defer the payment of duty and, if so, what they will be.

Experience abroad suggests that tax stamps have little impact on fraud. Several countries, including the United States, Greece and Ecuador, have abolished their tax stamp regimes. Others, such as Germany, Belgium and Norway, pulled back from introducing schemes in the first place. Hungary has tax stamps, but estimates suggest that illicit goods account for between 15 per cent. and 20 per cent. of the market. That is similar to Government estimates of fraud in the UK, so tax stamps do not appear to have worked in Hungary. The situation is even worse in Poland, which has tax stamps, but where about 80 per cent. of Scotch whisky is believed to be contraband. Other experience from overseas suggests that high-quality forgeries would appear within months and become common in the UK. Indeed, with duty at £5.48 a bottle, there would clearly be a strong incentive to produce forgeries, so the only growth industry as a result of the proposals would be counterfeiting.

The Scotch whisky industry also has significant reservations about the level of fraud suggested by the Government. The Government estimate that £600 million of revenue was lost in 2001–02 because of spirits fraud. That would mean that roughly one bottle in six of the spirits consumed in Britain is sold without the duty being paid. The Scotch whisky industry believes that that is a serious overestimate. If the Government's estimate is correct, 200,000 bottles—about 12 container loads—disappear every day. Nobody in the trade experiences the market disruption that would result from fraud on anywhere near that scale. Where is the Government's evidence? If the Government's estimate were correct, there would have been a 37 per cent. increase in spirits consumption over the past 10 years. Where is the evidence for that? If the Government's estimate that fraud is increasing were correct, we would also expect a decrease in legitimate sales. However, legitimate sales increased significantly in each of the last three years, which is more likely to imply a decrease in fraudulent sales.

The Government appear to lack confidence in their estimates. The Customs and Excise document "Measuring and Tackling Indirect Tax Losses", which was published last December, states:

Clearly estimating duty fraud is an inexact science. The Government now admit that they overestimated it in 1999–2000. How can they be confident that they do not still overestimate it? The Government cannot introduce a tax scheme that would be hugely expensive to legitimate industry without more convincing evidence.

In order to tackle fraud effectively, it is important to know which drinks were being sold without duty being paid. I therefore tabled two questions for the Chancellor. The first asked how many bottles of whisky and other spirits Customs and Excise had seized in the previous 12 months because duty had not been paid. The second asked how many prosecutions there had been for evading duty on whisky and other spirits in the previous 12 months. In reply to my first question, the Economic Secretary to the Treasury said:

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The second question received a similar answer:

In other words, the Ministers who propose the costly tax scheme do not even know how much of each spirit has been seized or over which spirits prosecutions have been brought. That is fundamental intelligence in the battle against fraud. I urge Ministers to do their homework first before urging costly measures against a legitimate trade.

Following my lack of success, I tabled another question for the Chancellor for answer on a named day, 12 January, to ask how many prosecutions there had been for evading duty on spirits in the most recent year for which figures were available. I thought that if Ministers could not break the data down into whisky and other spirits, I might be told the total. However, it was apparently too difficult for them even to find the answer to that question, and I am still waiting.

George Lyon, a Member of the Scottish Parliament and colleague, has had more success in eliciting an answer from the Scottish Executive, who revealed in a written answer that there had been only two prosecutions for duty fraud in 2001 and three in 2000. A total of five prosecutions in Scotland over two years hardly suggests fraud on a massive scale. The answer also revealed that the number of prosecutions had fallen year on year, from 27 in 1997. That backs up the Scotch Whisky Association's view that the fraud trend is downwards. The low number of prosecutions in Scotland indicates either that the level of fraud is low or that Customs and Excise is not devoting resources to the problem. The Government have not answered with the prosecution figures for England and Wales, but the Scottish figures show that there is not a major fraud problem and that the trend is downwards.

The Scotch Whisky Association, like all legitimate businesses, is keen to stamp out fraud and has put forward suggestions to the Government. They include additional monitoring, targeting and controls by Customs and Excise, where the patterns of trade are known to constitute the highest revenue risk. For example, investigations could be mounted where a new customer is buying in bulk or where unusual trading patterns emerge. The success of targeted measures has already been proven. There has been a recent steep decline in the amount of illicit spirits entering the country at ports, because that trade was targeted. I hope that the Minister will say today why the Government rejected the risk-based approach to tackling fraud proposed by the entire drinks industry last year.

Other Government proposals in the pre-Budget report for changes in the regulations have been proven uncontroversial. They include changes to the regulations governing warehouse keepers, producers and owners of duty-suspended alcohol, new requirements for the notification of cash transactions and advance payments and a scheme for recognising transporters with good compliance histories. Therefore, other methods could be introduced.

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Whisky companies have sophisticated tracing systems, such as numbers on the bottom of bottles. The legitimate trade can use its tracing system to find out where bottles have disappeared from the legitimate supply chain. If, as the Government allege, 200,000 bottles are being sold illegally each day, why has the industry not received a stream of inquiries from Customs and Excise to discover the source of those bottles?

One suggestion that the Chancellor could implement to eliminate most of the duty fraud immediately would be to reduce the duty on spirits to the same level per unit of alcohol as is imposed on wine. The big incentive to the criminal is the excessively high duty imposed in the UK on spirits, but not on other drinks.

I have some questions for the Minister. First, how will the proposed tax stamp scheme work? Secondly, why does he think it will work in the UK given the failure of similar schemes abroad? Thirdly, how does he justify the Government's estimate of the level of fraud, bearing in mind the low number of prosecutions in Scotland? Fourthly, why does he think the industry's alternative proposals to tackle fraud will not work?

The proposed stamp scheme would impose huge costs on the legitimate trade and would penalise the honest trader rather than the criminal. It threatens jobs in remote communities, such as Islay, Mull, Jura, Kintyre and Oban, where alternative employment is hard to find. The Government's estimate of the level of fraud is unconvincing. The proposed scheme failed in other countries. The Government should work with the industry to eliminate fraud and should throw these expensive proposals where they belong—in the waste bin.

Sir Nicholas Winterton (in the Chair): I congratulate the hon. Gentleman on his introduction to this important debate. It is my intention to try to call the Front-Bench spokesmen at 3 o'clock, commencing with the Liberal Democrat spokesman. If the other hon. Members who wish to speak can adjust their speeches accordingly, everyone will get in.

2.18 pm

Mr. Michael Connarty (Falkirk, East) (Lab): This is a timeous debate, because it shows that all Scottish Members have realised the impact of the Chancellor's announcement and have reacted swiftly. I congratulate the hon. Member for Argyll and Bute (Mr. Reid) on choosing this as his topic.

I thought that the hon. Gentleman was a little rosy and one-sided in his arguments, but I can understand why, given that he is deeply embedded in the isles where whisky is produced. However, there must be balance in the debate. Obviously, people will ask whether there is fraud, and we must conclude that the answer is yes. The evidence may be considered anecdotal, but I have certainly seen some evidence of fraud. Bottles of the golden spirit were sold on industrial premises where I worked or that I was passing through for a lot less than the price I might have expected to pay in shops. I can only conclude that someone, somewhere was not paying the full price to the Revenue, given that most of the cost of a bottle goes to the Revenue in taxation.

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The issue is whether the Chancellor's proposal is disproportionate to the situation in which we find ourselves. As I have said in questions to the Secretary of State for Scotland, there was during the last Parliament—some hon. Members present were not then Members of this place—a general acceptance by the industry that fraud was a problem. The scale of fraud has always been under discussion, but the industry took seriously the Chancellor's admonition that it must do something about the problem or he would be forced to do so through a method such as the strip stamp, pre-paid excise duty. There was agreement that the industry would do something significant to convince the Chancellor.

As we all know, it is difficult to convince the Chancellor about anything that would reduce his direct revenue take from enterprises or individuals in this country. I thought that the industry would take the matter much more seriously, but those on whose behalf I am openly arguing—people from the industry—do not think that the industry took it seriously enough. Whatever was said by the hon. Member for Argyll and Bute about what it might do, it is clear that it has not done enough to convince the Chancellor that sales of whisky and other spirits to the public without excise duty passing to the Treasury have been stopped, slowed down or reduced significantly.

Mr. Alistair Carmichael (Orkney and Shetland) (LD): Does the hon. Gentleman accept that the dialogue must be two-way? It is incumbent on the Chancellor and the Treasury to satisfy the industry about the scale of the problem, as significant doubts exist. A great deal may have to be done to improve relations between the industry and the Treasury if the Treasury figures are put to an independent audit.

Mr. Connarty : My suggestion to the Secretary of State for Scotland was that he should become involved in the debate—a meeting is planned for February—and that he seek some way of homing in on exactly how much fraud is taking place.

The Scotch Whisky Association stated that

which was the point made by the hon. Member for Argyll and Bute,

of the Customs and Excise estimates. If that is true, an obvious question would be how much impact the stamp proposal would have on the industry and how negative it would be compared with the benefits to the general taxpayer. Possibly other hon. Members, like me, enjoy a small measure of a good single malt whisky, but we do not have a right to deny the people of the United Kingdom their proper tax take from it.

I do not accept the argument that we should treat whisky like wine. Anyone from lesser nations who suggests that the golden liquid should be treated as disparagingly as wine is totally wrong. There is no

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sensible argument that would be supported by the Scottish people, never mind the British people, for reducing the excise duty on whisky to that on wine.

Angus Robertson (Moray) (SNP): Will the hon. Gentleman give way?

Mr. Connarty : I will not, because it was a trivial point and the hon. Gentleman will probably make a trivial intervention.

The Scotch Whisky Association makes a good point about the Chancellor's estimate of £600 million: in order to lose that amount of money, 12 container loads, or 200,000 bottles of whisky would have to be lost every day. I could say a lot about lack of staffing, vigilance, or other things in Customs and Excise, but I do not think that it would lose 200,000 bottles of whisky a day en route. Therefore, there is an argument that the Treasury claim is a bit exaggerated. If we were losing that amount of revenue, it would imply that there has been a 37 per cent. increase in total worldwide spirit consumption since 1992–93. I do not think that there has been such a massive increase, so, again, there is an argument that the Treasury's estimates go too far.

Fraud estimates seem to have gone up and down in the past three years. The estimate for 1999–2000 has changed: at first it was £450 million, then it went up to £500 million, then, in December, it came back down to £350 million. Funnily enough, that drop is equivalent to the purported saving that could be achieved using the strip stamp method. How can we get a proper audit? It is clear that excise duty is not being paid on all spirits. There has been a lack of application to the problem from the Scotch Whisky Association and, possibly, the Wine and Spirit Association, because the Chancellor was not driving them hard enough. When dialogue stops because one side stops asking a question, it is difficult to know whether someone should try to answer the original question. I think that the association was asked what it would do to stop fraud if we did not use strip stamps, but it has not properly answered that.

The likely impact of strip stamps will be increased costs and reduced competitiveness in the industry in general, but I want to focus on the impact on small producers and bottlers, because they are what I know best. As the hon. Member for Argyll and Bute said, it is not just a matter for the islands and the remote parts of Scotland. The impact would be substantial in many areas in Scotland that are considered to be fairly industrial. Grangemouth, in my constituency, has a major bottling plant, which is about to get a massive investment, thank goodness, from the new owners of Whyte and Mackay, which is talking about putting £50 million into marketing its brands—I will not list them all, although I did mention Isle of Jura and Dalmore earlier, of which I am very fond. They are good in both reputation and taste.

Many other areas would be affected by the proposal, including Fort William, East Kilbride, Airdrie, Broxburn, Tomatin in Inverness-shire, and the Isle of Arran. In Glasgow, there are five cases in which business would be affected. They include major employers and investors in the bottling industry and in the administration of the whisky industry. They would be affected disproportionately, not in the same way as larger owners such as Diageo.

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For smaller producers, such as Whyte and Mackay, the cost would be £33 million. Extra working capital would have to be raised to buy strip stamps, unless the scheme was moderated from the one proposed by the Chancellor three years ago. Putting excise duty strip stamps on bottles some time before money is retrieved from their sale, would cost companies an estimated £2 million in profit, which is a lot for a company that is about to invest £20 million in bottling and production and £50 million in marketing. It is a substantial argument against investment. Many investment houses would say, "The risk has gone up, the profit level has gone down, let's find something else to invest our money in." I hope that Whyte and Mackay's decision to build a brand-new bottling and processing plant at Grangemouth will not be affected by the Chancellor's decision, but I have no guarantee that it will not be; it could be seriously affected.

Angus Robertson : I commend the hon. Gentleman for starting to make a case in support of the Scotch whisky industry and remind him of the answer he received from the previous Secretary of State for Scotland, the right hon. Member for Airdrie and Shotts (Mrs. Liddell), almost a year ago, in which she stated that her office was heavily involved in the campaign to stop strip stamps. As the only Scottish Labour Member present in this debate—my apologies, I now notice that the hon. Member for Dumbarton (Mr. McFall) is sitting behind me—is the hon. Gentleman aware of the present Secretary of State for Scotland making any similar efforts in support of the campaign against strip stamps?

Mr. Connarty : I recognise that my hon. Friend the Member for Dumbarton (Mr. McFall), the Chairman of the Treasury Committee, is present in this debate, as I would expect. The reply by the Secretary of State for Scotland to me indicated that he does, in fact, take this seriously. He did rehearse some of the arguments that I have made as to whether there is a case to be answered about fraud, and he seemed to accept the Treasury figures, but his reply suggested that he is open to engaging in the debate, and I hope that we will be able to convince him that the level of fraud does not require such a draconian measure.

We must introduce a fair system that neither denies the UK its proper revenue nor encourages criminality, because it is criminal for so much whisky and other spirits to be sold by back-door methods without the excise duty being paid so that the revenue is lost. We want a "win-win" situation: a fair system that is not punitive towards the industry—certainly not towards the small producers, such as Whyte and Mackay, which I represent—but which allows the revenue that should be paid to be paid.

2.31 pm

Mr. Geoffrey Clifton-Brown (Cotswold) (Con): I congratulate the hon. Member for Argyll and Bute (Mr. Reid) on securing this debate. I declare my interest, if it is such, as the chairman of the all-party wine group.

It might help to set the debate in context if I were to quote exactly from the Chancellor's pre-Budget report, which gave rise to this matter:

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That came completely out of the blue to the industry; it had had no prior consultation on this matter whatsoever. The Government are using the threat that if the industry cannot come up with a solution to avoid what the Government see as £600 million of duty evasion—I will come on to whether that is a realistic figure in a moment—this measure will be imposed on the industry, it seems, no matter what damage it does. The hon. Member for Argyll and Bute is, therefore, absolutely right. The damage that this proposal will do to the industry is clear.

The industry is very important for UK taxpayers. Excise duties on spirits, beer, wine and man-made cider and perry raised £7.3 billion in 2002–03, and of this, spirits raised £2.27 billion. The industry is a very large earner for the Treasury, and it would be very foolish to put it at risk—and particularly the scotch whisky industry, with its jobs in rural locations such as those that the hon. Gentleman mentioned on Jura.

As I pointed out, the Chancellor said in his report that Customs and Excise estimated that £600 million in revenue was lost in 2001–02 as a result of spirits fraud of around 16 per cent. of the total spirits market. That amounts to £1.6 million, or about 12 container loads, or some 200,000 bottles being lost every single day. There is no evidence that the fraud is anywhere near that level. Customs and Excise says that this would imply a 37 per cent. increase in total spirits consumption since 1992–93. Surely it is very easy to discover by audit procedures whether that is the case.

The Government have consistently indicated confidence in their figures. When they first published Customs and Excise estimates of spirits fraud in 1999–2000, the figure was £450 million. Last year, these estimates for 1999–2000 were increased to £500 million, but in the December 2003 pre-Budget report the same figure had fallen to £350 million, a fall equivalent to the purported saving achievable from the use of the stamps.

The industry believes that the figures are wrong. Its estimate of the methodology is relatively complex and involves a series of intermediate assumptions and calculations each with scope to introduce margins of error. According to the Scotch Whisky Association's gap analysis, based on the Office for National Statistics survey data—a more straightforward gap methodology than that of Customs and Excise—the level of fraud has been reducing since the mid-1990s, reflecting a wide range of Government and trade anti-fraud measures. Under this analysis, revenue loss from illicit trades has fallen from £250 million in 1999–2000 to between £100 million and £150 million in 2001–02. If the industry's figure is right, one has to consider what the compliance costs and all the difficulties of introducing these strip stamps would be.

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I refer to an article by Mr. Jack Hibberd of Harpers News, in which he says:

The Government both exaggerates the duty that is lost and severely underestimates the compliance costs. The article goes on:

Here we have the industry saying that fraud is £150 million and the cost of introducing stamps would be £250 million. The measure would be nonsense. The WSA goes on to say that stamps would

You, Sir Nicholas, enjoyed a good lunch. I do not know how many bottles you had, but you can imagine the difficulties that a factory would face in having to put a sticky label over each of them. You can also imagine how much time and, therefore, effort would be involved in putting extra sticky stamps on each bottle.

The WSA also says that

would mean that the industry would

It says that there are

as well as

There will also be a costly

We have a number of examples where the stamps are used. Hungary, for example, has stamps, yet illicit goods account for some 15 per cent. to 20 per cent. of the market—a figure far higher than here. Evidence from central and eastern Europe is that genuine tax stamps can be used to disguise breaks in seals after refilling has occurred, and unscrupulous traders use stamps to add authenticity to counterfeit products.

Tax stamps cause an obstacle to free trade. UK tax stamps would force distillers to maintain country-specific stocks, forcing up costs and fragmenting the single market. Any industry moves to challenge stamps overseas will be inhibited and a damaging precedent set. Export markets might seek to follow the UK, causing damage to international competitiveness. Of course, at the end of the day, it is the poor old customer who has to pay.

We are told that Customs could do a number of things to reduce such fraud. I recently visited Dover with the all-party wine group to see what Customs was doing to reduce fraud, and I pay tribute to those officers who

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stand day in day out in some pretty filthy weather examining vehicles coming through Dover. With the limited numbers they have, they do a jolly good job.

In discussions on the Finance Act 1997, when the Government proposed to cut the number of Customs officers, I pleaded with the Government to increase the number of officers and to introduce a machine that would X-ray an entire lorry. I am glad to say that both those things have now happened. The X-ray machinery very quickly detects not only the contents of the lorry, but any hidden cavities and even illegal human traffic coming through Dover. I urge the Government to introduce more of these undoubtedly incredibly expensive pieces of machinery to more ports of entry. That might cut the amount of fraud.

The fraud mainly operates because of the system of duty suspension that has been created to facilitate alcohol trade. This system allows registered traders or warehouses to take part in a process that involves not paying duty and keeping goods in an approved warehouse. The registered traders then pay the duty nearer to the time that they sell the goods. Duty becomes payable on the goods only when they are released for consumption or acquired by an unregistered individual.

There are two types of fraud: outward diversion and inward diversion. We were told clearly by Customs that paperwork is fraudulently altered so that a cargo going to or from a warehouse does not arrive at its intended destination, but simply disappears. It would be quite easy to produce the paperwork or the information technology that would stop such fraud. When one considers that a consignment of whisky is worth £250,000 or more, just one load going adrift involves a significant loss to the Revenue.

No one in the House would say that the Government and Her Majesty's Customs and Excise should not try to tackle whatever fraud exists, but there are better ways to do it. I commend five courses of action. The Government could establish a specialist team to check and discredit the paperwork covering the movement of duty-suspended goods; they could implement a tougher HGV seizure policy targeting those hauliers who fail to conduct simple checks to ensure that they are not caught up in fraud; they could commence the redeployment of 146 additional assurance officers to strengthen the Excise holding and movement system; they could start a review of all warehouse approvals; and they could increase the resources deployed to exercise intelligence and research. If all that work were done properly, it could cut the amount of fraud.

The Roques report to the Government in July 2001 made eight recommendations: a more rigorous approach to the approval of warehouses; tightening the registration procedure for warehouses and the owners of goods; improving information on the holding and movement of excise goods when duty has not been paid; improving the exchange of information with other member states; increasing the checks on warehouse compliance with holding and movement regulations; tightening controls on hauliers; the deployment of additional staff; and the very last was considering the use of tax stamps for alcohol. The Economic Secretary to the Treasury is aware that a cross-party group managed to persuade the Treasury in 2003 not to introduce these stamps. I hope in view of what I and other Members have said—it clearly demonstrates that

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such a scheme would be extremely damaging to the UK spirits industry—that a better way can be found to reduce fraud than the scheme that the Chancellor has outlined.

2.44 pm

Mr. Alistair Carmichael (Orkney and Shetland) (LD): I add my congratulations to those already offered to my hon. Friend the Member for Argyll and Bute (Mr. Reid) on securing this debate, as he has a substantial constituency interest in the subject. As ever, he has prosecuted his constituency interest assiduously and with vigour. He also continues to represent many members of my family, so I am pleased to see that their interests are in good hands.

The Government's proposals will of course not affect only the Scotch whisky industry; they will also affect the large number of gin and vodka and other spirits producers in this country. However, I believe that the Scotch whisky industry has a special case. As my hon. Friend indicated, distilleries are often to be found in smaller, rural, peripheral communities, if I can call them that. As the hon. Member for Falkirk, East (Mr. Connarty) said, there are still a number of smaller players in the industry, and I will speak of one later. The maturation process means that the money that was invested by the distilling companies in Scotch whisky is very much a long-term commitment. There are also industrial enterprises that are exceptionally sensitive to any downturn in the wider economic picture, and that has an impact on local communities.

One of my principal concerns about the Government's proposals and the way in which they have been brought forward is the damage that will be done to the relationship between the distilling industry and different Departments, particularly the Treasury. As well as having an interest in Scotch whisky, the hon. Member for Falkirk, East and I share an interest in the offshore oil and gas industry. He will know that the Government went to considerable effort to build a good partnership arrangement with the industry through the pilot project. They then undid a lot of that good work in one stroke with the changes that they introduced overnight to the corporation tax regime.

I cannot help but notice that a parallel situation is developing. I counsel the Minister strongly that the work that has been done with the industry is in danger of being lost. The Government must properly address and state their case for the scale of the problem that they perceive. The figures have been explained by hon. Members already, and I will not go over them again, but it is incumbent on the Government to say, "This is our working. This is the result that we have reached and, as an indication of our confidence in it, we will make that working available for independent scrutiny and audit." We can then, perhaps, make a realistic estimation of the scale of the fraud and whether the long-term trend is upwards, or, as indicated by the figures given to the House by my hon. Friend the Member for Argyll and Bute, downwards.

On the subject of smaller players, my constituency has a rare beast. That is a new distillery, which is in the process of construction, and a company that is trying to break into the market for the first time. I have Orkney Highland Park distillery, which is no longer producing,

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and the Scapa distillery, which are long-term, well-established, highly respected brands. The Shetland distillery company will be in the very different position of trying to come into the market against the background of the need for long-term maturation and so on.

I spoke today to the director of Blackwoods Distillers, the company concerned, and she estimated that the cost per bottle would go from somewhere in the region of £2 to £6 with the addition of the duty stamp. That will require a massive increase in the working capital of that small, vulnerable, new business. I do not know how it is going to address that problem. I hope that the Minister has some comfort for Blackwoods Distillers and other small distilling companies, because to place that sort of burden on them to compensate for difficulties with Customs and Excise, to which the hon. Member for Cotswold (Mr. Clifton-Brown) referred, is simply not good enough.

That is a business that already produces Shetland gin and vodka, and which recently won a gold medal at the world spirits festival in Austria. So, we are talking about a quality product. It will be threatened by the Government's attitude and their insistence that the industry should bear the burden. As the hon. Member for Falkirk, East said, there has to be two-way traffic. As the industry has to play its part, so should the Government accept their responsibilities. To date, we have seen little sign of that.

2.49 pm

Angus Robertson (Moray) (SNP): I praise the hon. Member for Argyll and Bute (Mr. Reid) on having secured the debate. It is important for many of us who represent whisky-producing areas. I declare an interest in that I am a vice-chairman of the all-party Scotch whisky group, and more than 50 per cent. of Scotch malt whisky is sourced in my constituency. One would be hard pressed to find any major blended whisky without a significant Speyside malt component, so this damaging proposal is obviously of concern to me and to people on Speyside. It also impacts on parts of the country that do not necessarily produce whisky, but bottle, label or sell it or depend on the tourism bonus that whisky provides.

As has been mentioned, the Chancellor announced last December the latest detrimental Government proposal—whisky strip stamps. Within only 18 months of their being ruled out, we are set to see their possible return in an ineffective and inefficient attempt to tackle fraud. Sadly, they will damage this key industry, at home and abroad. This and previous UK Governments have maintained duty discrimination against Scotch whisky while claiming to be its friend. The hon. Member for Falkirk, East (Mr. Connarty) said that that was a trivial point. The level of duty is not a trivial point; it is very serious. One does not have to come from Dufftown to realise that it is perverse to be able to buy a bottle of whisky in Portugal at a fraction of the price that one pays in the country where it is produced.

Not only have we the perversity of discrimination against a leading product made in Scotland, but now we see the latest chapter in the targeting of the industry by a Treasury that views it as a cash cow. That is

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detrimental not merely to captains of industry but to the people who work in the industry and in the parts of the country that depend heavily on it. The hon. Member for Argyll and Bute rightly highlighted the financial burdens on the industry, and the hon. Member for Orkney and Shetland (Mr. Carmichael) the detrimental effects on new entrants to the whisky market.

However, there are other negative consequences. Earlier today, I spoke to a number of whisky producers on Speyside to find out their views of the proposals— the views not of the Scotch Whisky Association, the Scottish National party or other MPs representing whisky-producing areas, but of those who work in the industry on the shop floor. They said that it is a labour and logistical nightmare. The prospect of having to apply strip stamps to everything from miniatures to special bottlings, as well as maintaining separate stock for different markets, is a frightening one. They asked,

and I asked, "What is a lot number?",

I had never examined a label closely enough—I tend to concentrate more on the quality of the whisky—but every bottle has a lot number. I examined a small bottle of whisky that I have stored away for medicinal reasons. There it is: a series of digits that clearly identify the brand, the bottling line, the distillery and the cask. Apparently, one can make an audit trail even to the very second when the bottle was filled with whisky. So, the question was a good one: why are strip stamps to be imposed when there is already an audit trail to the whisky? If the information exists on every bottle of Scotch whisky, why is that not being used to help in the enforcement that everybody recognises to be crucial for tax revenues? We should support 100 per cent. Customs and Excise and all who work in the area. Everybody wants to minimise fraud, but surely we should use the method that we have to create an audit trail rather than reinventing something that, going by the evidence elsewhere, clearly does not work.

One does not have to look far to find examples. Norway, is Scotland's closest neighbour outside our islands. In 1997, the Norwegians adopted legislation to introduce strip stamps, but in the end, and despite the country's strict anti-alcohol legislation, they decided not to proceed. The move towards strip stamps was then opposed by the UK Government, on the advice of none other than the Department of Trade and Industry. The UK Government were advising the Norwegians not to do it. They told the Norwegians:

They went on to say that the regulations would

What has happened since then? What has changed so dramatically that that advice is now wrong? Hon. Members should be entitled to an explanation of why the situation has changed so radically that the advice is now fundamentally flawed.

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The European Commission has given warnings about the costs and difficulties posed by strip stamps. The 1999 Fiscalis seminar in Oporto concluded:

When the United States removed strip stamps in 1985, the US Department of Treasury said:

Why, then, do the UK Government think the complete opposite; why are they now thinking of using them? Spain and Greece also say that strip stamps are the wrong way to help in the battle against fraud—a battle that we all support.

In the last few minutes left to me, I shall ask the Minister some direct questions. I hope that he can answer them. First, can he answer the question left unanswered by his right hon. Friend the Secretary of State for Scotland during questions last week? I asked whether the Secretary of State could name a single industry figure or trade union representative working in the Scotch whisky industry who was in favour of the introduction of strip stamps. Secondly, does the Minister agree that paper stamps are a 19th century solution to a 21st century fraud, and in view of the damage that strip stamps would inflict on the competitiveness of the industry, will he undertake to visit the industry to see at first hand the impact of the proposals? Thirdly, can he tell us whether a tax stamp design has been approved, and what design measures will be used to prevent stamps from being forged?

The Government would do themselves a huge favour if they withdrew their daft and damaging proposal. If they do not, they will reinforce the impression that Scotch whisky is viewed by the Treasury as a cash cow. The will be acting in a detrimental manner, which will add to overheads, increase regulation and cause barriers to investment and to new market entrants. The Government were right to turn down strip stamps 18 months ago. They should do so again.

Sir Nicholas Winterton (in the Chair): Before I call the last speaker, I can tell the hon. Member for Dumbarton (Mr. McFall), the Chairman of the Select Committee, that I am sure that he will be able to speak in an intervention, but I am obliged to call the hon. Member for Knowsley, South (Mr. O'Hara), who has been present for the whole debate.

2.59 pm

Mr. Edward O'Hara (Knowsley, South) (Lab): I shall speak briefly, Sir Nicholas.

I speak with diffidence, being among so many indigenous experts on the Scotch whisky industry. However, as has been said, there are other producers. The products of Halewood International in my constituency are quite well known; they include Lambrini and Red Square vodka mixers and other unmixed spirits. I have no doubt that there is fraud: I see it all around me. Another aspect concerns me, however; I see young people in my constituency being debauched by those illicit products.

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I do not doubt that the Chancellor must introduce a measure. The only two questions are whether it is effective or cost-effective. There is a great deal of technical evidence from other countries of measures either not being introduced or being discontinued because of doubts about effectiveness, and good technical advice has been given on the problems of cash flow that are caused to small companies such as Halewood International.

In my brief time, I simply wanted to make those few points. I could have made more, but I hope that the Economic Secretary will take account of my views.

Sir Nicholas Winterton (in the Chair): Before I call the Liberal Democrat spokesman, I am indebted to the hon. Member for Knowsley, South (Mr. O'Hara) for his responsibility and honour in keeping to the timetable that I requested.

3 pm

Dr. Vincent Cable (Twickenham) (LD): I add my congratulations to my hon. Friend the Member for Argyll and Bute (Mr. Reid) on the forceful and compelling way in which he made the case on behalf of his constituency and for Scotland. Having lived in Scotland for some years, I am well aware of the importance of whisky both to the economy and to Scottish consumers. I confess that I remain deep down a rather boring Sassenach with a strict aversion to the drink, but I none the less recognise its importance to the UK economy.

I examined the pre-Budget report, and one of the more striking figures was that the revenue that the Government get from spirits, which is £2.4 billion—most of which is from whisky—is actually larger than the revenue from the North sea in the form of petroleum revenue tax. It is a major source of Government revenue, and policy has to be carefully crafted to get it right. There is a strong element of consensus, for which the hon. Member for Falkirk, East (Mr. Connarty) was reaching, in recognising that there is a fraud problem. It is inevitable that there will be fraud when there is a major gap between cost and sale price. That is the rent that attracts criminals.

We are not disputing points of principle. We are debating three issues of detailed implementation. The first concerns how much fraud there is. The second is whether the strip solution works, and the third, which the hon. Member for Knowsley, South (Mr. O'Hara) added, is whether the solution is cost effective. I shall touch briefly on each of those points. In relation to the size of fraud, the hon. Member for Cotswold (Mr. Clifton-Brown) gave a helpful range of the variety of figures that people come up with, from between £100 million and £150 million a year according to the industry, to £600 million a year from the Government's point of view.

It is important to have a consensus figure. I noticed, again in the pre-Budget report, that the Government are counting on bringing in an extra £175 million a year by 2006–07. That is their own estimate of the amount of fraud they will reduce in the form of increased excise taxes. It would be interesting to hear the Economic Secretary explain how that figure is derived, and the margin of error that surrounds it.

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There is no point in arguing that someone is right and someone is wrong. My hon. Friend the Member for Orkney and Shetland (Mr. Carmichael) put his finger on the point: an independent audit is needed. It could be carried out by the National Audit Office or by an independent audit company, but someone should look at the competing figures and come up with a sensible, balanced, middle-of-the-road assessment of how much fraud takes place.

The second problem concerns practicality. The industry asserts that one problem with the strips is that they can simply be forged. They are old technology and not immune to forgery. Is that true? If it is, it knocks a gigantic hole in the technical feasibility of the proposal. Have the Government carried out any cross-country studies of the practicalities? Numerous hon. Members, such as the hon. Member for Moray (Angus Robertson) and others, have set out specific examples of countries in which the proposal has either been rejected on grounds of technical unfeasibility or has been tried and found not to work.

The country that I noted in the literature was Poland, which has such a system, but where an estimated 80 per cent. of the market is still contraband. In other words, the system is very easy to evade. It is the Government who are changing the system; the onus is on them to demonstrate that it will work.

The third point is about cost-effectiveness. As a Treasury spokesman, I would be tempted to support the Government if the proposal brought in substantial additional revenue. However, it has to be balanced against the costs of enforcement and compliance, and what they will in turn mean for the price, sales and revenue of the product. We need a proper cost-benefit study, and I sense that no proper economic evaluation has taken place.

When other Departments introduce complex regulations, they are required to undertake a regulatory impact assessment that is evaluated by the Cabinet Office. I have no evidence of the Treasury or Customs and Excise embarking on any such assessment. It would be interesting to know whether such a study has been undertaken or contemplated, and when it will be published.

Several colleagues have drawn attention to the fact that, in the Government's assessment, the proposal was likely 18 months ago

One must ask what has changed since then. Several colleagues have explained, step by step, some of the compliance costs. One may need more staff to apply the strips, or the company might have to invest in equipment, which costs money, for a production-line approach. As a result of the imposition of strips, the production line will be slowed by an estimated 10 per cent.

I know very little about the industry but I understand that at the high end there are very small batches of different quality, all of which must have separate excises attached to them. The administrative costs are substantial. My hon. Friend the Member for Argyll and Bute stressed the cash flow problem because the excise is

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paid up front but sale takes place later. That means the industry requires working capital with all the costs that that entails. The hon. Member for Cotswold came up with the figure for all compliance costs of £250 million, which has been carefully worked through with the industry. I have heard nobody contradict it.

Where are the benefits to offset those considerable costs? If the costs are correct, where are they passed on? They must be added to the price of the product. We know that price is important in the whisky industry because when the right hon. and learned Member for Rushcliffe (Mr. Clarke) substantially increased the duty on whisky in one Budget, there was a substantial fall in sales. Governments have since learned their lessons. The industry is very price responsive, which means the proposed increase in costs will cause a fall in sales and revenue. None of that logic seems to have been thought through by the Treasury or Customs and Excise.

It is incumbent on those of us who are critical of the proposal to suggest what should be done. Clearly, there is a problem and some action must be taken. The hon. Member for Cotswold had a helpful list of action to take on compliance and enforcement. It must be intelligence-led with Customs and Excise, and the police must take action.

I have one rather self-promoting suggestion. I recently introduced a private Member's Bill on counterfeiting, which is one of the main sources of fraud and evasion in this country. That legislation is now on the statute book and it provides increased powers and penalties that enable the authorities to act against counterfeit whisky and other products. As far as I am aware, no action is being taken to use the legislation because of a deficiency of trading standards officers and resources and because Government authorities are failing to use the powers that they have. Much stronger action can be taken using the legal machinery and departments that already exist before we resort to a technically and economically questionable measure.

3.8 pm

Mr. Mark Prisk (Hertford and Stortford) (Con): I congratulate the hon. Member for Argyll and Bute (Mr. Reid) not only on securing a timely and useful debate but on his excellent exposition of the issues.

As we gathered from you, Sir Nicholas, all Members have what we might politely describe as an interest in the subject. I hope that the Minister noted that there is cross-party concern. It is clear that the spirits industry is vitally important to the UK economy. The Scotch whisky industry exports about 90 per cent. of its sales, which represents about £2,000 million in exports for this country.

The Government have told us that they wish to impose tax stamps on spirits because they believe that that will prevent fraud in the UK spirits market. Only last Tuesday, the Secretary of State for Scotland told the House:

What is the basis for that assertion? After all, a 16 per cent. fraud rate is neither recognised nor accepted by any leading member of the spirits industry. When one talks to the people and organisations involved in the

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industry, such as the Scotch Whisky Association, it is clear that they believe that those figures are wrong and misleading. The figures distract us from the central question of tackling the issue.

I add my congratulations to the hon. Member for Knowsley, South (Mr. O'Hara), who perhaps gave us all a lesson by making his points in less than three minutes. He is quite right. The issue is cost effectiveness. As the hon. Member for Argyll and Bute said, if the figure that the Government are asserting is correct, the much discussed 200,000 bottles must go missing each and every day; that is an extraordinary figure when one stops to think about it. The Gin and Vodka Association of Great Britain shares the view that that figure is distorted. The question we must ask is this—on what is the figure based?

As several Members have shown, the problem seems to be that the figures on which the Government base their estimate are unclear and, for the most part, they run counter to much of the other evidence. Both the surveys used by the Office for National Statistics—the national food survey and the family expenditure survey—are based on a rather complex methodology, which does not, for example, reflect the true amount of customs clearances. They therefore make assumptions on incomplete and opaque data, as my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) highlighted.

The Roques report, commissioned by the Paymaster General in 2000, estimated that spirit fraud peaked in 1995–96 and that that type of fraud would steadily decrease from 1999–2000. Given that evidence, and the Government's statement in December—just a month ago—that customs clearances have risen significantly, the claim of £600 million in fraud seems completely at odds with the other evidence.

Although Her Majesty's Opposition recognise that fraud is an ongoing problem that should be countered, we are not convinced or persuaded by the Government's figures, and nor is the industry. I therefore ask the Minister to accept that if anti-fraud measures are to work, they must be based on accepted and verifiable data. If that is so, and I trust that he will agree that it is, what is the evidence for the claim of £600 million in fraud? Just as importantly, will he confirm that he will still accept representations on the question of the scale of the problem? After all, the industry want to work in partnership with the Government, and only such partnership will provide a sustainable solution.

The question is not only about flawed data, but about a proposal that is both crude and ineffective in seeking to deal with the problem. Many people are worried that the measure will end up damaging industry without getting to the root of much of the illegal activity. In April 2002, the Chancellor himself dismissed tax stamps as a viable option. A Budget press release stated:

That is a direct quote, taken today from the Inland Revenue's website.

Why have the Government changed their mind? We know we know that tax stamps can be easily forged. Several Members have referred to that. With UK duty

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at £5.48 a bottle, the incentive for forgery is strong. Forged stamps add authenticity to illegal products, thus confusing customers and undermining their confidence in the industry.

We also know that tax stamps would damage UK exports by imposing significant costs on the spirits industry and undermining its international competitiveness. Colleagues have mentioned several different estimates of the cost to the industry, and the figure of £250 million mentioned by the Liberal Democrat spokesman, the hon. Member for Twickenham (Dr. Cable), has yet to be disputed. Such disproportionate costs to the industry completely undermine the Treasury's argument, given that the Government hope to recover only £160 million in lost revenue.

Spirits manufacturers would also face cash flow problems. The hon. Members for Moray (Angus Robertson) and for Orkney and Shetland (Mr. Carmichael) highlighted the fact that many businesses run on small profit margins. They would have to buy strips of stamps outright, but might not see a return on their outlay for some while. The problem would be especially acute at the smaller end of the industry, where price sensitivity and competitiveness are intense.

Is it any wonder that many of the countries that have considered a tax stamp scheme, which may even have started going down that road, have rejected the proposal as inefficient and ineffective? As the hon. Member for Argyll and Bute said, Greece, Ecuador and the United States abolished tax stamps. Belgium, Germany and Norway backed off introducing them once they realised their true impact, and the hon. Member for Moray told us of the Government's fascinating intervention in Norway's case. Hon. Members have highlighted one reason for such uncertainties—the example of Poland, where, bizarrely, 80 per cent. of the Scotch whisky that is sold is believed to be contraband, despite the fact that tax stamps are in place.

This debate is timely because it gives us a chance to ask the Economic Secretary to think again. To that end, several excellent suggestions have been made, not least by my hon. Friend the Member for Cotswold, but I want to deal with the alternative suggested by the industry in response to the consultation initiated by the Economic Secretary's office last July. The industry proposed that we take a risk-based approach instead of introducing a tax stamp scheme. It suggested that trade be categorised in three different ways: approved routes, notifiable routes and non-approved routes. Let me briefly explain what those mean. Under procedures for approved routes, Customs and Excise would regulate with a light touch, and companies' procedures would be subject to Customs and Excise audit. Under the provisions for notifiable routes, traders would be presumed to act with due diligence, but notification might be triggered where a new customer or unusual trading patterns emerged. Under the procedures for non-approved routes, additional Customs and Excise monitoring and controls would apply to movements with the highest revenue risk, such as those involving an unusual pattern or suspicious orders. By focusing on higher-risk movements, we would have a better chance of dealing with lost revenue while not placing an unfair burden on legitimate trade.

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No detailed feedback on those ideas has so far been forthcoming from Customs and Excise. What is the Economic Secretary's view of taking a risk-based approach as an alternative to implementing tax stamps? What is the Treasury's response to the specific ideas that were presented to the Government last year? When the hon. Gentleman replies, I hope that he will be able to reassure us that his mind is open to new ideas and his door to new representations. After all, it is no more in the industry's interest for fraud to take place than it is in the Government's interest for revenue to be lost.

3.19 pm

The Economic Secretary to the Treasury (John Healey) : I pay tribute to the hon. Member for Argyll and Bute (Mr. Reid) for securing the debate, which is timely and topical. I also welcome the tone of his argument and that of all hon. Members who have participated. As the hon. Member for Hertford and Stortford (Mr. Prisk) said, there is clearly cross-party concern about the issue.

I recognise that the hon. Member for Moray (Angus Robertson) speaks for a very strong constituency in Speyside, but the accusation that the Treasury sees the Scotch whisky industry as a cash cow could not be further from the truth. The cost of the latest freeze in the series of duty freezes that we placed on the spirits industry is £40 million to the Treasury. I say to him and to the hon. Member for Twickenham (Dr. Cable), who expressed concern about what happens in other countries, that more than 40 countries to which Scotch whisky is exported retain and find a use for strip stamps as part of their duty regime. Some countries—Spain, Portugal and Italy—allow the stamps to be applied in Scotland before export.

My hon. Friend the Member for Falkirk, East (Mr. Connarty) rightly urged us to ensure that the debate was balanced and to implement a fair system for the industry that does not deny the criminality that bedevils the spirits sector more widely.

My hon. Friend the Member for Knowsley, South (Mr. O'Hara) reminded us of the damage done to communities throughout the United Kingdom by the illicit alcohol sales that we need to stamp out.

The hon. Member for Hertford and Stortford asked me whether the Government and I are still accepting representations on the scale of the problem, which I recognise is a subject of debate and close examination. We not only accept, but actively encourage such representations and discussions with the industry.

As the hon. Member for Cotswold (Mr. Clifton-Brown), who chairs the all-party group on wine, rightly said, this is an important industry for the UK economy and taxpayer. I welcome his comments about the work of Customs and Excise. We do not intend, as he suggested or feared, to implement measures that will put the industry at risk.

I agree with the hon. Member for Orkney and Shetland (Mr. Carmichael) that Scotch whisky has a special place in the spirits industry.

I say to all hon. Members who participated, and to the hon. Member for Argyll and Bute in particular, that I recognise concerns about the proposed set of measures

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and the harm that some fear they may cause to the Scotch whisky industry. I know that the industry shares those concerns. Following the pre-Budget report, there has been an unprecedented period of detailed discussion with the industry and with other concerned parties, including hon. Members. Officials have had 16 meetings since the report. I have met representatives of the leading producer associations such as the Scotch Whisky Association, the Gin and Vodka Association and the Wine and Spirit Association, and I plan further meetings with the key trade bodies.

I am delighted to see my hon. Friend the Member for Dumbarton (Mr. McFall), who is treasurer of the all-party group on Scotch whisky, in his place. I offered to continue the debate by attending a meeting of the all-party group. He bit my hand off, and we have fixed on 3 February, so I can tell the hon. Members for Argyll and Bute and for Moray, who are vice-chairmen of the group, that we may continue our discussions beyond this afternoon.

My hon. Friend the Member for Dumbarton also invited me to Scotland to visit a couple of distilleries, which I will visit later next month. I also aim to see the representatives of the Scotch Whisky Association during that visit.

As my right hon. Friend the Chancellor of the Exchequer said in his pre-Budget statement, and as we confirmed in the pre-Budget report—[Interruption.] I will give way, but I am anxious to cover the many points that hon. Members have raised.

Mr. John McFall (Dumbarton) (Lab/Co-op): I thank the Minister for that announcement, and for his positive engagement over several years with the all-party group. However, the pertinent issue is the integrity of the figures for fraud. He mentioned that I chair the Treasury Committee, and he knows that there may be an opportunity for Customs and Excise to present its annual report to that Committee in the future. If that happens before the Budget, it will be thoroughly examined on the integrity of the figures, because competitiveness and productivity are crucial to the industry.

John Healey : We recognise that that is an issue. As my right hon. Friend the Chancellor made clear in the pre-Budget statement, we would welcome workable alternatives to the proposals on tax stamps that would have a similar impact on spirits fraud. If we have to introduce strip stamps, we shall carefully consider the costs to the industry of compliance. We shall also consider the case for freezing the duty on spirits for the rest of this Parliament and how deferment arrangements could be extended to address the concerns about working capital that some hon. Members have expressed. I should like to extend the invitation for constructive discussion and examination of workable alternatives not only to the hon. Member for Argyll and Bute, but to all hon. Members who have participated in this debate and to those who will continue it through the all-party parliamentary group.

The Government recognise the importance of the Scotch whisky industry and the UK spirits industry generally. My right hon. Friend the Chancellor has been doing his bit: in six straight Budgets we have frozen the

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duty on spirits, which is the longest continuous freeze since the 1950s. That means that the standard bottle of spirits now bears nearly £1 less in duty than it did in 1997. It is important to the industry and us that the UK retains its integrity and is not undermined by the activities of fraudsters. Like the hon. Member for Argyll and Bute, I pay tribute to the industry's declared determination to clamp down on such fraud.

The Government have been determined to tackle alcohol fraud, and we have largely done so as regards cross-channel smuggling. However, our central concern remains fraud in spirits, which is a complex activity that exploits the alcohol trade's very particular structure. The centuries-old system is designed to facilitate trade, but is also vulnerable to abuse by fraudsters. Diversion fraud, which hon. Members have so clearly explained, accounts for most illicit alcohol duty losses.

Let us be clear: the fraudsters are no Robin Hoods. They are not helping hard-done-by drinkers to get round our tax rules. The people behind the spirits diversion frauds are in organised criminal gangs that are often involved in other illicit activities. The vast majority of illicit spirits are sold through retail outlets, usually at normal market prices, without the drinker, or in many cases the retailer, being any the wiser.

The rise in spirits fraud has come despite customs action following the Roques report, which many hon. Members mentioned. That work, which includes an extra 214 staff who are dedicated to alcohol assurance and anti-fraud work, is in addition to the valuable work done on the trade through the joint spirits fraud task force. Despite that, the fraud is not being significantly hit, nor could it be so, realistically speaking. A further consultation, led by my office, was held over the summer, as a consequence of which Customs will

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introduce a package of regulatory measures that are designed to tighten up some of the vulnerable points in the alcohol distribution and duty suspension system. However, those proposals are modest and incremental, and will not, in isolation, have a significant impact on fraud.

The consultation contained options aimed at reducing movement and sales of undutied, unsecured alcohol. We proposed to place a limit of one or two movements on sales in duty-suspended goods destined for the UK market. However, it became clear in detailed discussions with the trade that those proposals would not be effective, since EU law prevents us from limiting duty suspension for goods sourced from outside the UK and requires us to allow goods bound for other EU states to leave under duty suspension. There is also evidence that some retailers would either source more spirits from abroad or move their warehouse operations abroad to avoid a more restricted regime for intra-UK movements.

In sum, against the background of a worsening problem, success in tackling fraud in other excise regimes and the apparent lack of alternatives, the implementation of a tax stamp system on spirit bottles is a necessary and proportionate step. We recognise, however, the questions that the industry has raised about the figures, and we are sharing data to try to settle its doubts. The chancellor has made it clear that he wants to see whether an effective and workable alternative can be found. We shall discuss with the industry the most cost-effective way of implementing tax stamps if we need to. We shall consider the possible costs for the industry of complying with a tax stamp system, and we shall consider extending the duty freeze for whisky and other spirits not just for one year but for every year of this Parliament.

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